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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT 1934
From the transition period from ________ to ________
COMMISSION FILE NUMBER 333-34120
ISTA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0511729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15279 ALTON PARKWAY, SUITE 100, IRVINE, CALIFORNIA 92618
(Address of principal executive offices)
(949) 788-6000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates on March 15, 2001 was approximately $39,185,000.
As of March 15, 2001 there were 15,504,983 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from
the Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 2000.
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TABLE OF CONTENTS
PART I
Item 1: Business ................................................................................ 3
Item 2: Properties .............................................................................. 21
Item 3: Legal Proceedings ....................................................................... 21
Item 4: Submission of Matters to a Vote of Security Holders ..................................... 21
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters ................... 22
Item 6: Selected Financial Data ................................................................. 23
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations ... 24
Item 7A: Quantitative and Qualitative Disclosures about Market Risk .............................. 28
Item 8: Financial Statements and Supplemental Data .............................................. 28
Item 9: Changes and Disagreements with Accountants and Financial Disclosure ..................... 28
PART III
Item 10: Executive Officers of the Registrant .................................................... 29
Item 11: Executive Compensation .................................................................. 30
Item 12: Security Ownerships of Certain Beneficial Owners and Management ......................... 30
Item 13: Certain Relationships and Related Transactions .......................................... 30
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K ......................... 31
SIGNATURES
CONSOLIDATED FINANCIAL STATEMENTS
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PART I
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements concern matters that involve
risks and uncertainties that could cause actual results to differ materially
from those projected in the forward-looking statements. Discussions containing
forward-looking statements may be found in the material set forth under
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in other sections of this report Words such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential" or "continue" or similar words are intended
to identify forward-looking statements, although not all forward-looking
statements contain these words.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date hereof to conform such statements to actual results or to changes
in our expectations.
Readers are urged to carefully review and consider the various disclosures made
by us which attempt to advise interested parties of the factors which affect our
business, including without limitation "Risk Factors" set forth in this Form
10-K.
ITEM 1: BUSINESS
OVERVIEW
ISTA Pharmaceuticals, Inc. (the Company or ISTA) was founded to discover,
develop and market new remedies for diseases and conditions of the eye. Our
product development efforts are focused on using highly purified formulations of
the enzyme hyaluronidase to treat diseases and conditions such as vitreous
hemorrhage, diabetic retinopathy, corneal opacification and keratoconus. Each of
these conditions affects a significant number of patients worldwide and can
impair vision and potentially cause blindness.
Our lead product candidate, Vitrase, is in Phase III clinical trials for the
treatment of severe vitreous hemorrhage. Vitrase has received "fast-track"
designation by the FDA, which generally qualifies for priority review, or agency
review within six months from acceptance of the filing of a New Drug Application
for Vitrase. We are also conducting a pilot Phase IIa clinical trial of Vitrase
in Mexico for the treatment of diabetic retinopathy, the leading cause of adult
blindness in the United States. In March 2000, we entered into a collaboration
with Allergan, Inc. under which Allergan will be responsible for the marketing,
sale and distribution of Vitrase in the United States and all international
markets, except Mexico and Japan. We are also developing Keratase and Keraform
for the treatment of corneal opacification and keratoconus, abnormalities of the
cornea.
STRATEGY
Our objective is to build a leading biopharmaceutical company that discovers,
develops and commercializes new and superior drug products for treatment of
diseases and conditions of the eye. The key elements of our strategy are to:
- Focus on diseases and conditions representing large underserved
markets in ophthalmology. We are targeting diseases and
conditions, including vitreous hemorrhage, diabetic retinopathy,
corneal opacification and keratoconus, for which there are
currently no approved drug treatments. Surgical procedures, when
available for these conditions, carry significant risks. These
conditions represent a substantial market opportunity in the
United States, Europe and Japan. We are developing Vitrase to
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address diseases and conditions in the back of the eye, an area
where few therapies are currently available.
- Maximize the market opportunity for Vitrase. We are focused on
bringing Vitrase to market as quickly as possible and ensuring
that it gains broad acceptance for treatment of serious
conditions of the eye. We have entered into a collaboration with
Allergan, under which Allergan has agreed to use its extensive
marketing capabilities to commercialize Vitrase. We are
currently in Phase III clinical trials of Vitrase for treatment
of severe vitreous hemorrhage and are conducting a pilot Phase
IIa clinical trial for treatment of diabetic retinopathy.
- Leverage our expertise and proprietary position with the enzyme
hyaluronidase. We believe that the unique properties of
hyaluronidase make it suitable to be used safely and effectively
for numerous applications in the eye. We have a successful track
record of discovering and patenting new applications for
hyaluronidase. All three of our clinical stage product
candidates include hyaluronidase. We plan to identify additional
applications for this enzyme for potential future development.
- Form strategic collaborations to accelerate commercialization of
our products. To enable us to capitalize more quickly on
commercialization opportunities for our products, we will
continue to explore additional collaborative opportunities with
pharmaceutical companies or others that have domestic and
international sales and marketing expertise. As we pursue future
collaborations, we may choose to retain some strategic sales and
marketing rights.
- Identify, in-license and acquire complementary products and
technologies. We may acquire or in-license complementary
products and technologies. We believe that our substantial
expertise in the development of ophthalmic products positions us
well to attract, evaluate and secure future opportunities.
ANATOMY OF THE EYE
The human eye is approximately one inch in diameter and functions much like a
camera. The eye incorporates a lens system (the cornea and the lens) that
focuses light, a variable aperture system (the iris) that controls the amount of
light passing through the eye and a film (the retina) that records the image.
The cornea, lens and iris operate to focus light rays on the retina, which
contains the receptors that transmit images through the optic nerve to the
brain.
The cavity between the lens and the retina is filled with the vitreous humor, a
clear, gel-like substance. The vitreous humor is nearly solid in children and
undergoes a natural transition to liquid as one ages.
[ILLUSTRATION OF EYE]
Cornea: The clear, transparent outer portion of the front of the eye
that provides most of the eye's focusing power.
Iris: The colored part of the eye that helps control the amount of
light that enters the eye.
Pupil: The dark hole in the middle of the iris through which light
enters the eye.
Lens: The transparent structure inside the eye (behind the cornea and
iris) that also focuses light rays onto the retina.
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Vitreous humor: The clear, gel-like substance that fills the back of the
eye between the lens and the retina.
Retina: The nerve layer that lines the back of the eye. The retina
senses light and transmits impulses that are sent through the
optic nerve to the brain.
Optic nerve: The nerve that connects the eye to the brain and carries
the impulses formed by the retina.
HYALURONIDASE
The term hyaluronidase describes a group of naturally occurring enzymes that can
digest certain forms of carbohydrate molecules called proteoglycans. The primary
role of hyaluronidase is to digest proteoglycans such as hyaluronan, hyaluronic
acid and chondroitin sulphate, substances that are part of various connective
tissues in the body, including connective tissues in the eye. Physicians have
used hyaluronidase safely and extensively for over 50 years to enhance the
absorption of drugs.
In the eye, pharmacological applications of hyaluronidase exploit the properties
of this enzyme to modify the structure of the eye for therapeutic purposes. In
our development work, we have focused on applications of hyaluronidase to take
advantage of its ability to digest proteoglycans to treat a variety of eye
diseases and conditions, including vitreous hemorrhage, diabetic retinopathy,
corneal opacification and keratoconus. For treatment of serious conditions of
the eye, or ophthalmic indications, only highly purified and specially
formulated hyaluronidase can be used. Hyaluronidase that is less pure or
formulated with preservatives has been shown to be dangerous to the eye and may
cause blindness.
PRODUCT DEVELOPMENT PROGRAMS
We have three product candidates in various stages of clinical development as
well as other product candidates that we are evaluating in preclinical studies.
The following is a summary of our clinical stage product candidates:
PRODUCT INDICATION DEVELOPMENT STATUS MARKETING RIGHTS
- ------- ---------- ------------------ ----------------
Vitrase Severe vitreous hemorrhage Phase III Allergan
Diabetic retinopathy Phase IIa Allergan
Keratase Corneal opacifications Phase IIb --
Keraform Keratoconus Phase IIa planned --
Allergan has licensed worldwide rights for Vitrase, except for Mexico and Japan.
Vitrase
We are developing Vitrase, a proprietary formulation of hyaluronidase, for
treatment of severe vitreous hemorrhage and diabetic retinopathy. When injected
into the vitreous humor, Vitrase breaks down the proteoglycan matrix, causing
the vitreous humor to liquefy. We believe that this also results in the
separation of the vitreous humor from the retina and that, together, these
effects are beneficial for treatment of severe vitreous hemorrhage and diabetic
retinopathy. Vitrase is administered directly into the vitreous humor through a
single-dose injection. The procedure is performed in several minutes in an
ophthalmologist's office and is virtually painless due to application of a
topical anesthetic. In March 2000, we entered into a collaboration with Allergan
for the marketing, sale and distribution of Vitrase in the United States and all
international markets, except Mexico and Japan.
Vitreous Hemorrhage
A vitreous hemorrhage occurs when retinal blood vessels rupture and bleed into
the vitreous humor. These hemorrhages result from leakage from abnormal, weak
blood vessels and are associated with diabetic retinopathy, trauma and other
factors. The immediate consequence of a vitreous hemorrhage is a reduction in
the amount of light that can pass through the normally clear vitreous humor to
the retina. The effects of a
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hemorrhage can be limited to a few dark spots in vision or, in the case of a
severe vitreous hemorrhage, can result in completely obscured vision. Depending
on the severity of the vitreous hemorrhage, it may take several months or
significantly longer for the body to reabsorb the blood and for the patient to
regain vision. In addition to obstructing the patient's vision, a vitreous
hemorrhage often prevents physicians from seeing into the back of the eye to
diagnose or treat the cause of the hemorrhage. If extensive or repeated bleeding
occurs, fibrous tissue or scarring can form on the retina, which can lead to a
detachment of the retina and permanent vision loss or blindness.
Patients who seek medical care for a vitreous hemorrhage often visit a
physician, who then refers them to a retinal specialist. Treatment options for
patients with a vitreous hemorrhage are limited. Currently, there is no drug
treatment for vitreous hemorrhage and most retinal specialists initially
recommend a "watchful waiting" period, during which the attending physician
provides no medical treatment in the hope that the hemorrhage will clear on its
own. The risks related to watchful waiting may include continued bleeding and,
if caused by diabetic retinopathy, disease progression during the time it takes
for the blood to clear on its own, if at all. An alternative to watchful waiting
is a surgical procedure called a vitrectomy, in which the vitreous humor and
hemorrhage are surgically removed and replaced with a balanced salt solution.
There are serious risks associated with a vitrectomy, including both cataract
formation and possible loss of vision associated with retinal detachment. These
risks contribute to the limited use of vitrectomy as an initial treatment option
for vitreous hemorrhage patients.
We believe that a substantial opportunity exists to establish Vitrase as the
initial therapy for a severe vitreous hemorrhage. Vitrase, when injected into a
blood-filled vitreous humor, promotes clearance by causing the vitreous humor to
liquefy and the blood to settle to the bottom of the eye. Vitrase also
stimulates the cells responsible for engulfing and breaking down the blood,
accelerating the reabsorption of the blood. This clears the path for light to
reach the retina enabling the patient to regain vision. In addition, clearing
the hemorrhage permits the retinal specialist to visualize, diagnose and treat
the underlying cause of the vitreous hemorrhage.
Hemorrhage density can vary significantly between patients who experience
vitreous hemorrhage, but even a mild hemorrhage indicates the existence of a
serious problem. However, because of the absence of a validated and generally
accepted medical definition of the various densities of vitreous hemorrhage, we
classify a vitreous hemorrhage as either mild, moderate or severe depending on
the density of the vitreous hemorrhage as observed by the physician:
- mild vitreous hemorrhage is characterized by trace blurring of
retinal blood vessels
- moderate vitreous hemorrhage is characterized by partial
obscuration of retinal blood vessels and/or the optic nerve
- severe vitreous hemorrhage is characterized by complete
obscuration of retinal blood vessels and/or the optic nerve
Market Opportunity. Based on market research that we commissioned in February
1999, we believe that approximately 450,000 cases of vitreous hemorrhage occur
each year in the United States, a total of 400,000 cases occur each year in the
five largest European markets and 190,000 cases occur each year in Japan.
Approximately 60% of these cases are due to diabetic retinopathy, 15% are due to
trauma and 25% are due to other factors. Potential investors must understand
that Vitrase is unlikely to be used in all cases of vitreous hemorrhage. We
believe that approximately half of all cases are candidates for treatment using
Vitrase.
Clinical/Regulatory Status. In October 1998, the FDA granted fast-track
designation for Vitrase for the treatment of severe vitreous hemorrhage. The FDA
may approve products with fast-track designation based on clinical studies using
surrogate endpoints that are reasonable predictors of a clinical benefit.
We are currently conducting two Phase III trials for the treatment of severe
vitreous hemorrhage. These trials are prospective, randomized, parallel,
placebo-controlled and double-masked studies. We are
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conducting one trial, our North American trial, in the United States, Mexico and
Canada and will include up to 680 patients. We are conducting the other trial in
Europe, Brazil, Australia and South Africa and will include up to 510 patients.
As of March 15, 2001, we have enrolled over 900 patients in these trials.
In both studies, we are enrolling patients who have both a severe vitreous
hemorrhage that has been present for at least one month and a best corrected
visual acuity of less than 20/200 at initial screening. After enrollment,
patients are randomly assigned to either a test group or a control group.
Patients in the test group receive either a 7.5 (North America only), 55 or 75
international unit, or IU, injection of Vitrase. Patients in the control group
receive a saline injection. Treatment success in both studies is defined by the
occurrence of any one of the following surrogate endpoints, which must occur
within three months following treatment with Vitrase:
- panretinal laser photocoagulation surgery to slow or stop the
cause of the vitreous hemorrhage
- other surgical treatment not specifically indicated for the
clearance of the vitreous hemorrhage (for example, vitrectomy to
enable treatment of retinal detachment)
- documented medical evidence that the clinical cause of the
vitreous hemorrhage has been resolved without the need for
further therapy
If a surrogate endpoint is achieved, we intend to file a New Drug Application
with the FDA using accelerated approval provisions. If the product is approved
based on a surrogate endpoint, we will have a requirement to validate the
surrogate endpoint by demonstrating that patients treated with Vitrase had a
clinically relevant improvement in visual acuity or other related clinical
benefit. This can be done post approval. Substantiating a clinical benefit, if
any, could be a long process and may be significantly affected by patient
dropout or patients' unwillingness to undergo potentially long term
post-treatment evaluation.
Prior to the initiation of our Phase III trials, we completed Phase I, Phase IIa
and two Phase IIb trials of Vitrase. The Phase I trial was conducted in Mexico
and involved 14 patients. Our Phase IIa trial was a pilot safety/efficacy study
involving 18 patients with vitreous hemorrhage, four of whom were administered a
saline injection, 13 of whom were administered a 75 IU dose injection of Vitrase
and one of whom was administered Vitrase in one eye and saline in the other eye.
The primary efficacy variable was time to clearance of the vitreous, defined as
the investigator's ability to view the retina with sufficient clarity to treat
all areas from which the hemorrhage might have originated. Following the
administration of either Vitrase or saline, patients were observed for a period
ranging from 19 to 124 days, with the average being 56 days. Nine of the 14
patients treated with Vitrase experienced clearance of their vitreous hemorrhage
during the period in which these patients were observed while none of the
patients that received saline experienced clearance of their vitreous
hemorrhage.
We have completed two Phase IIb clinical trials of Vitrase in the United States
and Mexico. The two prospective, randomized, double-masked, non-placebo
controlled clinical trials involved a total of 378 patients who had a vitreous
hemorrhage for at least one month due to diabetic retinopathy or spontaneous
bleeding that was sufficiently severe to prevent adequate diagnosis or
treatment. The patients were randomly administered either a 7.5, 37.5 or 75 IU
dose injection of Vitrase. The primary efficacy variable for both clinical
trials was clearance of the vitreous hemorrhage, which was defined as the
ability of the investigator to see the back of the eye with sufficient clarity
to identify the cause and/or begin appropriate treatment.
In our Phase IIb Mexico clinical trial, we evaluated 225 patients for up to
eight weeks following treatment. Hemorrhage clearance was achieved in 48.5% of
patients in the 7.5 IU group, 47.1% of patients in the 37.5 IU group, and 63.2%
of patients in the 75 IU group. There was no statistically significant
difference among any of the dosage groups for the total patient population
analysis. However, in a retrospective analysis we divided the total patient
population into two discrete subsets, mild/moderate and severe, and found that
for patients with a severe vitreous hemorrhage, there was a statistically
significant difference in vitreous hemorrhage clearance in the 75 IU dosage
group (62.7%) when compared to either the 7.5 IU (40.4%) or the 37.5 IU (40.4%)
dosage groups. Although this study was not designed to evaluate visual acuity as
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primary endpoint, visual acuity data was collected. Visual acuity improved an
average of three lines on the eye chart for patients in each of the three
treatment groups who experienced clearance of their vitreous hemorrhage. Visual
acuity in patients with non-cleared eyes was essentially unchanged from baseline
with no improvement shown. A valid statistical analysis comparing the change in
visual acuity between patients with cleared eyes and patients with non-cleared
eyes could not be made since patients had not been prospectively randomized into
these two groups.
In our Phase IIb U.S. clinical trial, we evaluated 153 patients for up to 56
days following treatment. Hemorrhage clearance was achieved in 54.0% of patients
in the 7.5 IU group, 41.5% of patients in the 37.5 IU group, and 56.5% of
patients in the 75 IU group. There was no statistically significant difference
among dosage groups. A retrospective analysis of patients that we classified as
having either a mild/moderate or severe vitreous hemorrhage was not
statistically significant between dosage groups. In this retrospective analysis,
the vitreous hemorrhage clearance rates for severe hemorrhage patients was 56.3%
in the 75 IU group as compared to 36.1% in the 37.5 IU group and 40.0% in the
7.5 IU group.
Despite the absence of a control group in our two Phase IIb clinical trials, we
believe that all three doses used in our Phase IIb clinical trials were active
and showed varying levels of clearance. We believe this is the first time that
any pharmacological agent has been shown to promote the clearance of vitreous
hemorrhage in patients. Based on the results of our Phase IIb clinical trials,
we commenced our two Phase III clinical trials of Vitrase, including a placebo
control group involving a saline injection, for the treatment of severe vitreous
hemorrhage.
Based on our evaluations to date, there have been no significant safety issues
associated with the use of Vitrase in our clinical trials. Depending on the
Vitrase dose, 0% to 45% of patients typically within a day of injection,
experience an inflammatory response near the front of the eye between the iris
and cornea, which is undetectable to the patient. This condition generally
requires no treatment by the retinal specialist and typically resolves itself
within seven to 10 days. In our clinical trials, some physicians chose to
prescribe topical anti-inflammatory medicine to treat the inflammation.
Diabetic Retinopathy
Abnormal changes and/or damage to the blood vessels in the eye due to diabetes
is known as diabetic retinopathy. Diabetic retinopathy is a progressive disease
consisting of two stages, nonproliferative and proliferative. Nonproliferative
diabetic retinopathy is the first stage of diabetic retinopathy and occurs when
the retinal blood vessels swell and leak fluid and small amounts of blood into
the eye. Proliferative diabetic retinopathy occurs when normal retinal blood
vessels become obstructed and new, abnormal blood vessels begin to grow, or
proliferate, on the surface of the retina or into the vitreous humor. The growth
of these new, abnormal blood vessels creates a dangerous condition because they
are weak and grow beyond the supporting structure of the retina. These blood
vessels are prone to bleeding and hemorrhage, and can lead to serious problems,
including retinal tears and retinal detachment, both of which can severely
impair vision and cause blindness. There is no cure for diabetic retinopathy.
Under current practice, physicians do not generally treat patients at the
nonproliferative stage of the disease because there is no effective treatment
available. The most common treatment for patients with proliferative diabetic
retinopathy is panretinal laser photocoagulation. In this treatment, a laser
makes hundreds of tiny burns to the retina to reduce the growth of the abnormal
blood vessels into the vitreous humor. Panretinal laser photocoagulation surgery
has been shown to be effective in slowing the progression of proliferative
diabetic retinopathy. Panretinal laser photocoagulation surgery frequently leads
to increased loss of night vision and can make night driving more difficult.
Also, after panretinal laser photocoagulation surgery, peripheral, or side
vision, is often not as good as before the surgery.
We believe that Vitrase can treat diabetic retinopathy at the nonproliferative
stage. Following injection into the vitreous humor, Vitrase acts to separate the
vitreous humor from the retina, thereby limiting growth of retinal blood vessels
into the vitreous humor. We believe that Vitrase achieves this by breaking down
the proteoglycan component of the substance that binds the vitreous humor to the
retina and by liquefying the vitreous humor. This process allows the vitreous
humor to detach from the retina. Retinal specialists
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consider this detachment to be beneficial to diabetic retinopathy patients
because it delays the progression of the disease.
Market Opportunity. Diabetes continues to be a major healthcare problem in the
United States and is projected to continue growing rapidly in many regions
outside the United States. Eye disease is commonly associated with diabetes, and
the risk of blindness to individuals with diabetes is 25 times greater than in
the general population. Of the nearly eight million individuals in the United
States diagnosed with diabetes, four to six million have some form of diabetic
retinopathy. The majority of individuals with diabetic retinopathy are in the
nonproliferative stage of the disease. We believe that these people are
potential candidates for treatment using Vitrase.
Clinical/Regulatory Status. We have conducted a preclinical study using an
animal model to simulate the effects of diabetic retinopathy. In this model, the
growth of abnormal blood vessels in the eye was accelerated by administration of
growth factors. In the treated animals, Vitrase was injected into the vitreous
humor two weeks prior to the administration of the growth factors. Vitrase
significantly reduced the growth of abnormal blood vessels in the
Vitrase-treated group versus the control group.
In October 1999, we commenced a 60 patient pilot Phase IIa clinical trial in
Mexico City to evaluate the safety and efficacy of a single dose injection of
Vitrase to cause a detachment of the vitreous humor from the retina and the
impact on slowing the progression of diabetic retinopathy over a one-year
period. We completed enrollment in this trial in March 2000. Patients were
monitored for one year following enrollment in the trial. In two arms of this
four arm trial, Vitrase is being evaluated versus a saline control in patients
with nonproliferative diabetic retinopathy. In addition to these two arms, we
are studying the ability of a gas called sulfur-hexafluoride, or SF6, when used
as an adjunct to Vitrase, to enhance the efficacy of Vitrase in detaching the
vitreous humor from the retina. A published, preclinical study has shown that
SF6 in combination with Vitrase may be effective in separating the vitreous
humor from the retina in an animal model. This study also includes an
SF6-gas-only, control study arm. The continued development of Vitrase for the
treatment of diabetic retinopathy will be dependent upon our ability to raise
additional capital. If we are successful in raising capital in a timely manner,
then we may conduct additional trials in the United States to evaluate the
safety and efficacy of Vitrase for treatment of diabetic retinopathy.
Keratase
We are developing Keratase, a proprietary formulation of hyaluronidase, for the
nonsurgical treatment of corneal opacification. Keratase is a more concentrated
formulation of hyaluronidase than Vitrase and is delivered in lower volume.
Corneal opacification occurs when the cornea, which is normally transparent,
becomes scarred, cloudy or opaque, diminishing the amount of light entering the
eye. The severity of opacification can range from scars outside the line of
vision to uniformly opaque corneas where light transmission is reduced to the
point of blindness.
A normal, clear cornea contains collagen fibrils that are uniformly spaced and
connected together by proteoglycans. We believe that abnormal deposits of
proteoglycans cause corneal opacification following bacterial, fungal or viral
infection or trauma to the eye. We believe this results in an irregular
rearrangement of the collagen fibrils, which leads to scattering of light and
hazy or blurry vision.
There are currently no approved drug treatment options for corneal
opacification. The only treatment option is a corneal transplant, whereby a
donor cornea is used to replace a damaged cornea. The number of corneal
transplants is limited by cost and availability of donor corneas. The risks
associated with corneal transplants include loss of vision, rejection and
creation of severe astigmatism.
We believe Keratase can be used to treat corneal opacifications with benefits
equivalent to those of corneal transplants but without the associated risks of
rejection and astigmatism. We believe that Keratase digests the abnormal
deposits of proteoglycans that connect the collagen, allowing the collagen to
reorganize, thereby enabling improved vision. Over time, the proteoglycans
reform to connect the corneal collagen in the proper reorganized structure.
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Market Opportunity. Based on market research that we commissioned in October
1999, we believe that there are approximately three million people in the United
States, Western Europe and Japan that have a form of vision impairment due to
corneal opacification, with nearly 200,000 new cases of corneal opacification
occurring each year. Potential investors must understand that Keratase is
unlikely to be used in all cases of vision impairment due to corneal
opacification. We believe that the majority of these cases are candidates for
treatment using Keratase.
Clinical/Regulatory Status. We have conducted preclinical studies using human
donor corneas with opacification due to scarring. Keratase, when injected into
these corneas, cleared a majority of the corneas with opacification in less than
one week, while a saline control injection was not effective.
In May 2000, we commenced a 30 patient Phase IIb trial of Keratase for the
treatment of corneal opacification due to infection or trauma. The trial
includes five Keratase dose groups and a saline control group. The trial will
evaluate the improvement in aided and unaided visual acuity in patients who have
best corrected vision of no better than 20/100 at entry. The trial is being
conducted in Mexico City under U.S. and Mexico Investigational New Drug
applications. We completed enrollment in this trial in July 2000. The continued
development of Keratase is dependent upon our ability to raise additional
capital.
Keraform
We are developing Keraform, a proprietary system for the treatment of
keratoconus. Keratoconus is a degenerative corneal disease that impairs vision
and is characterized by progressive thinning of the cornea and the development
of an irregular, cone-like protrusion of the cornea, typically in both eyes. As
the disease progresses, vision becomes increasingly distorted. Keratoconus
typically has its onset during puberty or early adulthood, and usually
progresses over a 10 to 20 year period. The rate of progression and severity can
vary among patients, ranging from mild astigmatism to severe loss of vision.
Eyeglasses do not help the vision of these patients as the severity of
keratoconus increases. Most patients choose to wear hard contacts lenses with
limited long term effectiveness. Currently, the only permanent treatment for
keratoconus is a corneal transplant.
Due to the lack of permanent, nonsurgical methods to treat keratoconus, we
believe that Keraform, if successfully developed, will be an attractive option
to treat keratoconus. We believe Keraform, a nonsurgical system, can reshape a
patient's cornea to stabilize, improve or correct keratoconus. Treatment with
Keraform involves three steps:
- Step One. In order to make the cornea more malleable, a
proprietary formulation of hyaluronidase is injected into the
stroma, the middle layer of the cornea. The hyaluronidase
digests the proteoglycans that bind the collagen together in the
stroma, making the cornea soft and malleable.
- Step Two. A custom fitted, hard contact lens is temporarily worn
by the patient to reshape the cornea.
- Step Three. Topical stabilizing drops containing glycerose are
used to set the cornea to maintain the proper shape once optimal
vision correction is achieved. Glycerose, a naturally occurring
chemical found in the body, when used in the eye crosslinks the
collagen to make the cornea more rigid.
Market Opportunity. Based on market research that we commissioned in October
1999, we believe that there are approximately 400,000 people in the United
States, Western Europe and Japan who currently have keratoconus. Potential
investors must understand that Keraform is unlikely to be used in all cases of
keratoconus. We believe that a majority of these people are candidates for
treatment using Keraform.
Clinical/Regulatory Status. We plan to conduct a pilot Phase IIa clinical trial
of Keraform for the treatment of keratoconus, with the trial consisting of four
study arms and a total of 24 patients. The primary study objective is to safely
and effectively reshape and stabilize the corneas of keratoconus patients.
Patients enrolled in the trial will receive either a hyaluronidase or a saline
injection, and topical glycerose or saline stabilizing drops. The continued
development of Keraform is dependent upon our ability to raise additional
capital.
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COLLABORATION WITH ALLERGAN
In March 2000, we entered into a collaboration with wholly owned subsidiaries of
Allergan, including a license agreement for the marketing, sale and distribution
of Vitrase, a supply agreement for Vitrase and a stock purchase agreement for
$10.0 million of our Series D preferred stock. A joint operating committee has
been constituted and consists of an equal number of members from each company
who will oversee development, regulatory and marketing activities with respect
to Vitrase. Allergan is a leading provider of eye care and specialty
pharmaceutical products throughout the world.
Under the terms of our agreements with Allergan:
- Development. We are responsible for all product development,
preclinical studies and clinical trials in support of marketing
approvals of Vitrase for treatment of severe vitreous hemorrhage
in the United States and Europe. We are also responsible for all
preclinical studies and clinical trials to demonstrate the
safety and efficacy of Vitrase for treatment of diabetic
retinopathy.
- Regulatory Approvals. We are responsible for applying for and
obtaining regulatory approval of Vitrase in the United States
from the FDA and in the European Union. Allergan will be
responsible for applying for and obtaining regulatory approvals
of Vitrase in markets outside the United States and the European
Union where it deems appropriate.
- Manufacturing. We are responsible for the manufacture of Vitrase
and, if approved, for supplying all of Allergan's requirements
for Vitrase during the term of the license agreement.
- Marketing. In the United States, Allergan will be responsible
for the overall management of marketing, sale and distribution
activities for Vitrase through its established sales and
marketing organization. Under the terms of the license
agreement, we will employ medical specialists in the United
States to assist in physician training and usage development. In
all markets outside the United States, except Mexico until 2004
and Japan, Allergan will be solely responsible for the
marketing, sale and distribution of Vitrase.
- Milestone Payments. Allergan has agreed to pay us up to $35.0
million in milestone payments based on our achievement of
specified regulatory and development objectives with respect to
Vitrase for treatment of vitreous hemorrhage and diabetic
retinopathy. To date, we have not received any milestone
payments from Allergan.
- Profit Sharing and Royalties. In the United States, we will
split profits on the sale of Vitrase with Allergan on a 50/50
basis during the term of the license agreement. Allergan's
license to market, sell and distribute Vitrase in the United
States will expire ten full calendar years following the date of
its first commercial sale, at which time all commercial rights
for Vitrase in the United States will revert to us. In all
markets outside the United States, except Mexico until 2004 and
Japan, we will receive a royalty on all sales of Vitrase by
Allergan. Allergan's obligation to pay royalties will terminate
on a country-by-country basis upon the later of ten full
calendar years following the date of the first commercial sale
in each particular country and the expiration date of the
last-to-expire licensed patent in that country.
RESEARCH AND DEVELOPMENT
Since our inception, we have made substantial investments in research and
development. During the years ended December 31, 2000, 1999 and 1998, we spent
$16.2 million, $11.1 million and $7.5 million, respectively, on research and
development activities. Given our limited capital resources, we plan to focus
primarily on the continued development of Vitrase for the treatment of severe
vitreous hemorrhage. If we are successful in raising additional capital that
enables us to continue the development of all of our clinical stage products and
our early stage research projects, then we plan to focus our internal research
and development efforts on the development of novel ophthalmic therapies.
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In addition to our product candidates in clinical trials, we have a number of
early stage research projects underway. These projects include both new and
existing chemical compounds that may have application for the treatment of
ophthalmic diseases and disorders. We have identified an existing chemical
compound that may help reduce the risks associated with macular translocation
surgery, a complex surgical procedure. Depending on the availability of
sufficient capital resources, we may conduct further preclinical trials before
proceeding to human trials of any of these chemical compounds for the potential
treatment of ophthalmic disorders.
PATENTS AND PROPRIETARY RIGHTS
Our success will depend in part on our ability to obtain patent protection for
our inventions, to preserve our trade secrets and to operate without infringing
the proprietary rights of third parties. Our strategy is to actively pursue
patent protection in the United States and foreign jurisdictions for technology
that we believe to be proprietary and that offers a potential competitive
advantage for our inventions. To date, we have filed six U.S. patent
applications for Vitrase technologies, two of which have issued for the use of
hyaluronidase to clear vitreous hemorrhage, one of which is pending for the
additional use of hyaluronidase to clear vitreous hemorrhage, and one of which
is pending for the use of hyaluronidase to treat other vitreoretinal disorders.
In addition, we have licensed one U.S. patent and the corresponding European
patents for the treatment of certain ophthalmic conditions using enzymes, such
as hyaluronidase derived from other sources. We hold four issued U.S. patents
for the Keraform technologies and have one additional U.S. patent application
pending. In addition, we are negotiating with a third party for our acquisition
of rights to one patent and patent applications owned by such party related to
our Keraform product. If we are not successful in finalizing this acquisition,
we may be required to license these patent rights in order to commercialize our
Keraform product as currently planned. Such a license may not be available to us
on favorable terms, if at all. If such license is not available and we
commercialize our Keraform product in its current configuration, there is a
possibility that we could be sued for patent infringement should any patents
containing claims related to our Keraform product issue from these patent
applications. We have also filed two other U.S. patent applications, one
covering the use of our Keratase product for clearing corneal opacification and
the other covering the use of our technology for retinal translocation.
In addition to patents, we rely on trade secrets and proprietary know-how. We
seek protection of these trade secrets and proprietary know-how, in part,
through confidentiality and proprietary information agreements. We require our
employees, directors, consultants and advisors, outside scientific collaborators
and sponsored researchers, other advisors and other individuals and entities to
execute confidentiality agreements upon the start of employment, consulting or
other contractual relationships with us. These agreements provide that all
confidential information developed or made known to the individual or entity
during the course of the relationship is to be kept confidential and not
disclosed to third parties except in specific circumstances. In the case of
employees and some other parties, the agreements provide that all inventions
conceived by the individual will be our exclusive property. These agreements may
not provide meaningful protection for or adequate remedies to protect our
technology in the event of unauthorized use or disclosure of information.
Furthermore, our trade secrets may otherwise become known to, or be
independently developed by, our competitors.
COMPETITION
The markets for therapies that treat diseases and conditions of the eye are
subject to intense competition and technological change. Many companies,
including major pharmaceutical companies and specialized biotechnology
companies, are engaged in activities similar to ours. Such companies include
Alcon Laboratories, Inc., Bausch & Lomb Incorporated and CIBA Vision (a unit of
Novatis AG). Some of these companies have substantially greater financial and
other resources, larger research and development staffs and more extensive
marketing and manufacturing organizations than ours. Many of these companies
have significant experience in preclinical testing, clinical trials and other
parts of the regulatory approval process.
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We are not aware of any other drug candidates in clinical trials for the
treatment of vitreous hemorrhage or corneal opacification. Eli Lilly and Company
is currently conducting clinical trials for the use of a systemic drug to treat
diabetic retinopathy, and several companies are working on drugs and systems to
help control diabetes and the consequences of diabetes, including diabetic
retinopathy. In the case of keratoconus, we are aware of a surgically implanted
device being tested in clinical trials by KeraVision, Inc.
Our success will depend, in part, on our ability to:
- demonstrate the safety and efficacy of our products
- obtain regulatory approval in a timely manner
- demonstrate potential advantages over alternative treatment
methods
- obtain marketing and distribution support from our collaborators
- obtain reimbursement coverage from insurance companies and other
third-party payors
- demonstrate cost-effectiveness
- obtain patent protection
MARKETING AND SALES
We plan to market and distribute our Vitrase product in the United States and
all international markets, except Mexico and Japan, through our collaboration
with Allergan. We have a distribution agreement with Laboratories Sophia S.A. de
C.V. providing for the marketing, sales and distribution of Vitrase in Mexico
until April 2004. In the United States, the primary target market for Vitrase
will initially be retinal specialists to whom most patients with vitreous
hemorrhage are referred. We plan to pursue a collaboration similar to our
collaboration with Allergan for the marketing, sales and distribution of Vitrase
in Japan.
For our Keratase and Keraform products under development, we plan to develop our
own sales, marketing and distribution infrastructure to establish these
therapeutic products as the standard of care. To achieve this objective, we will
focus on:
- publishing our research in peer review journals
- developing and increasing awareness of these products by
recruiting opinion-leading ophthalmologists as spokespersons for
our products
- using physician and patient education to build awareness of
these products
We will need to devote significant financial and management resources to develop
a sales and marketing organization. Our failure to establish effective sales and
marketing capabilities could prevent us from directly marketing and selling
Keratase and Keraform.
We intend to enter into additional agreements with pharmaceutical companies or
other third parties for marketing and other commercialization activities
relating to some of our product candidates. However, we may not be able to enter
into additional relationships and these relationships, if established, may not
be commercially successful.
THIRD-PARTY REIMBURSEMENT
In the United States, physicians, hospitals and other healthcare providers that
purchase pharmaceutical products generally rely on third-party payors,
principally private health insurance plans and Medicare and
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to a lesser extent Medicaid, to reimburse all or part of the cost of the product
and procedure for which the product is being used. We expect that patients with
severe vitreous hemorrhage who are candidates for Vitrase treatment will
include, primarily due to demographic factors, patients with health insurance
coverage provided by Medicare and private insurers, including Medicare health
maintenance organizations. Currently, a Medicare reimbursement code has been
established for the intravitreal injection of a pharmaceutical agent, which, we
believe, will be appropriate for physician billing for a Vitrase injection.
Hospitals and physicians are reimbursed separately for drugs. Typically, the
Health Care Financing Administration, or HCFA, the governmental agency
responsible for Medicare reimbursement policy, does not issue national coverage
guidelines for individual drugs. Drug specific coverage policies are primarily
developed by individual health insurance companies following Medicare's criteria
for drug coverage, which include, among other requirements, that the drug be FDA
approved, be used in connection with a physician service and be medically
reasonable for the treatment of an illness or injury. While reimbursement may be
available under existing payment codes for miscellaneous injectable drugs, such
reimbursement requests are reviewed separately by each Medicare health insurance
provider. Widespread and uniform reimbursement for our injectable drug products
will require the establishment of a specific reimbursement code for the
injectable drug, which is issued by HCFA following review of an application by
the manufacturer. To support our applications for reimbursement coverage with
Medicare and other major third-party payers, we intend to use data from clinical
trials, including Phase III and Phase IV clinical trials, to demonstrate the
healthcare and economic benefits of using Vitrase for severe vitreous
hemorrhage. The lack of satisfactory reimbursement for our drug products will
limit their widespread use and lower potential product revenues.
Reimbursement systems in international markets vary significantly by country
and, within some countries, by region. Reimbursement approvals must be obtained
on a country-by-country basis. In many foreign markets, including markets in
which we anticipate selling our products, the pricing of prescription
pharmaceuticals is subject to government pricing control. In these markets, once
marketing approval is received, pricing negotiations could take another six to
twelve months or longer. As in the United States, the lack of satisfactory
reimbursement or inadequate government pricing of our products will limit their
widespread use and lower potential product revenues.
GOVERNMENT REGULATION
Our pharmaceutical products are subject to extensive government regulation in
the United States. If we distribute our products abroad, these products will
also be subject to extensive foreign government regulation. In the United
States, pharmaceutical products are regulated by the FDA. FDA regulations govern
the testing, manufacturing, advertising, promotion, labeling, sale and
distribution of our products.
The FDA approval process for drugs includes:
- preclinical studies
- submission of an Investigational New Drug application for
clinical trials
- adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product
- submission of a New Drug Application
- review of the New Drug Application
- inspection of the facilities used in the manufacturing of the
drug to assess compliance with the current Good Manufacturing
Practices regulations
The New Drug Application includes comprehensive, complete descriptions of the
preclinical testing, clinical trials, and the chemical, manufacturing and
control requirements of a drug that enables the FDA to
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determine the drug's safety and efficacy. A New Drug Application must be
submitted and filed and approved by the FDA before a drug can be marketed
commercially.
The FDA testing and approval process requires substantial time, effort and
money. We cannot assure you that any approval will ever be granted.
Preclinical studies include laboratory evaluation of the product, as well as
animal studies to assess the potential safety and effectiveness of the product.
These studies must be performed according to good laboratory practices. The
results of the preclinical studies, together with manufacturing information and
analytical data, are submitted to the FDA as part of the Investigational New
Drug application. Clinical trials may begin 30 days after the Investigational
New Drug application is received, unless the FDA raises concerns or questions
about the conduct of the clinical trials. If concerns or questions are raised,
the Investigational New Drug application sponsor and the FDA must resolve any
outstanding concerns before clinical trials can proceed. We cannot assure you
that submission of an Investigational New Drug application will result in
authorization to commence clinical trials. Nor can we assure you that if
clinical trials are approved, that data will result in marketing approval.
Clinical trials involve the administration of the product that is the subject of
the trial to volunteers or patients under the supervision of a qualified
principal investigator. Furthermore, each clinical trial must be reviewed and
approved by an independent institutional review board at each institution at
which the study will be conducted. The institutional review board will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution. Also, clinical trials must be performed
according to good clinical practices. Good clinical practices are enumerated in
FDA regulations and guidance documents.
Clinical trials typically are conducted in three sequential phases, Phases I, II
and III, with Phase IV studies conducted after approval and generally required
for drugs subject to accelerated approval regulations. These phases may overlap.
In Phase I clinical trials, the drug is usually tested on healthy volunteers to
determine:
- safety
- any adverse effects
- dosage tolerance
- absorption
- metabolism
- distribution
- excretion
- other drug effects
In Phase II clinical trials, the drug is usually tested on a limited number of
afflicted patients to evaluate the efficacy of the drug for specific, targeted
indications, determine dosage tolerance and optimal dosage, identify possible
adverse effects and safety risks. In Phase III clinical trials, the drug is
usually tested on a larger number of patients, in an expanded patient population
and at multiple clinical sites. The FDA may require that we suspend clinical
trials at any time on various grounds, including a finding that the subjects are
being exposed to an unacceptable health risk.
In Phase IV clinical trials or other post-approval commitments, additional
studies and patient follow-up are conducted to gain experience from the
treatment of patients in the intended therapeutic indication. Additional studies
and follow-up are also conducted to document a clinical benefit where drugs are
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approved under accelerated approval regulations and based on surrogate
endpoints. In clinical trials, surrogate endpoints are alternative measurements
of the symptoms of a disease or condition that are substituted for measurements
of observable clinical symptoms. Failure to promptly conduct Phase IV clinical
trials and follow-up could result in expedited withdrawal of products approved
under accelerated approval regulations.
If Vitrase is approved under accelerated approval regulations, we expect that we
will be required to conduct extended Phase IV studies or complete extensive
clinical follow-up in patients treated with Vitrase for severe vitreous
hemorrhage to monitor the long term effects of the therapy and demonstrate
that the primary surrogate endpoints were reasonable predictors of the drug
product's clinical benefits. If we gain accelerated approval for Vitrase for
severe vitreous hemorrhage, we cannot assure you that any post-approval
follow-up will validate an objective clinical benefit or that patients will be
willing to participate in any long-term follow-up.
Food and Drug Administration Modernization Act of 1997
The Food and Drug Administration Modernization Act of 1997 was enacted, in part,
to ensure the availability of safe and effective drugs, biologics and medical
devices by expediting the FDA review process for new products. The Modernization
Act establishes a statutory program for the approval of fast- track products.
The fast-track provisions essentially codify the FDA's accelerated approval
regulations for drugs and biologics. A fast-track product is defined as a new
drug or biologic intended for the treatment of a serious or life-threatening
condition that demonstrates the potential to address unmet medical needs for
this condition. Under the new fast-track program, the sponsor of a new drug or
biologic may request the FDA to designate the drug or biologic as a fast-track
product at any time during the clinical development of the product. The
Modernization Act specifies that the FDA must determine if the product qualifies
for fast-track designation within 60 days of receipt of the sponsor's request.
Fast-track designated products may qualify for accelerated approval and priority
review, or review within six months. Accelerated approval will be subject to:
- post-approval studies and follow-up to validate the surrogate
endpoint or confirm the effect on the clinical endpoint
- prior review of all promotional materials
If a preliminary review of the clinical data suggests that the product is
effective, the FDA may initiate review of sections of an application for
fast-track designation for a product before the application is complete. This
rolling review is available if the applicant provides a schedule for submission
of remaining information and pays applicable user fees. However, the time period
specified in the Prescription Drug User Fees Act, which governs the time period
goals the FDA has committed for reviewing an application, does not begin until
the complete application is submitted.
In October 1998, the FDA granted our application for fast-track designation for
Vitrase for the treatment of severe vitreous hemorrhage. We cannot predict the
ultimate impact, if any, of the fast-track process on the timing or likelihood
of FDA approval of Vitrase or, if fast-track status is granted, any of our other
potential products.
International
For marketing outside the United States, we also are subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products. The requirements governing the conduct of clinical
trials, product approval, pricing and reimbursement vary widely from country to
country. Whether or not FDA approval has been obtained, approval of a product by
the comparable regulatory authorities of foreign countries must be obtained
before manufacturing or marketing the product in those countries. The approval
process varies from country to country and the time required for such approvals
may differ substantially from that required for FDA approval. We cannot assure
you that clinical trials conducted in one country will be accepted by other
countries or that approval in one country will
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result in approval in any other country. For clinical trials conducted outside
the United States, the clinical stages are generally comparable to the phases of
clinical development established by the FDA.
MANUFACTURING
Hyaluronidase, the active pharmaceutical ingredient used in Vitrase, Keratase
and Keraform, is sourced from ovine testes and processed in several stages to
produce a highly purified raw material for formulation. We have a supply
agreement with Biozyme Laboratories Limited for cGMP-grade hyaluronidase for use
in ophthalmic applications. The hyaluronidase is lyophilized, or freeze dried,
by Biozyme and delivered to our contract manufacturer, Prima Pharm, Inc. for
formulation and filling of dose specific vials. Vitrase is currently required to
be stored under refrigerated conditions prior to its use.
We intend to continue using Biozyme and Prima Pharm as our sole source suppliers
of raw materials and manufacturing services. To date, they have manufactured
only limited quantities of our products for clinical trial use. For commercial
scale production we may need to qualify and validate additional suppliers and
contract manufacturers and hire and train additional employees to supervise
these operations.
HUMAN RESOURCES
Including the employees of our Visionex Pte. Ltd. subsidiary, as of March 15,
2001, we had 39 full-time employees, 35 of whom were based in the United States,
two of whom were based in Singapore and two of whom were based in Mexico.
Approximately 30 of our employees are involved in research and clinical
development activities. Seven of our employees hold Ph.D. or M.D. degrees and
seven other employees hold other advanced degrees. Our employees do not have a
collective bargaining agreement. We consider our relations with our employees to
be good.
RISK FACTORS
WE HAVE A HISTORY OF NET LOSSES; WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND
WE MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.
We have only a limited operating history upon which you can evaluate our
business. We have incurred losses every year since we began operations. As of
December 31, 2000, our accumulated deficit was $76.9 million, including a net
loss of approximately $41.1 million for the year ended December 31, 2000. We
have not generated any revenue from product sales to date, and it is possible
that we will never generate revenues from product sales in the future. Even if
we do achieve significant revenues from product sales, we expect to incur
significant operating losses over the next several years. It is possible that we
will never achieve profitable operations.
OUR PHASE III CLINICAL TRIAL RESULTS FOR VITRASE ARE UNCERTAIN. IF TRIAL RESULTS
ARE NOT SATISFACTORY, WE MAY BE FORCED TO TERMINATE DEVELOPMENT OF VITRASE.
We are currently conducting two multinational Phase III clinical trials for
Vitrase in patients that we classify as having a severe vitreous hemorrhage. If
the results of these trials are not satisfactory, we will need to conduct
additional clinical trials or cease the development of Vitrase. These trials are
designed to support accelerated regulatory approval. Products subject to
accelerated approval regulations are generally given priority review, meaning
the FDA will attempt to complete review of our application within six months of
filing. Vitrase has also received fast-track development designation from the
FDA for the treatment of severe vitreous hemorrhage. We cannot predict the
ultimate impact, if any, of the fast-track process on the timing or likelihood
of FDA approval of Vitrase. If we obtain accelerated approval, we will need to
continue following patients who participate in the trial or initiate additional
clinical trials to document improvement in visual acuity or other related
objective clinical benefit. This may require several years of follow-up. If
there is significant patient drop-out from the study after treatment or if
patients fail to participate in follow-up procedures, we will be unable to
document improvement in visual acuity or other related objective clinical
benefit. If we fail to document an improvement in visual acuity or other related
objective clinical benefit, the FDA may withdraw our approval on an expedited
basis.
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IF WE CANNOT RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS, WE WILL NEED TO
SIGNIFICANTLY CURTAIL OUR OPERATIONS.
Due to an increase in planned research and development expenditures in
connection with the completion of our Phase III clinical trials for Vitrase, we
believe that our cash on hand will be sufficient to fund our operations and
capital expenditure needs for approximately the next 15 months. During this
period, we plan to allocate our capital resources primarily to the development
of our lead product candidate, Vitrase for the treatment of severe vitreous
hemorrhage. We will need to raise additional funds to continue the development
and commercialization of Vitrase for severe vitreous hemorrhage, and further the
development of our other product candidates beyond this period.
These funds may not be available on favorable terms, or at all. If we do not
succeed in raising additional funds, we will need to curtail our operations
significantly.
IF WE DO NOT RECEIVE AND MAINTAIN REGULATORY APPROVALS FOR OUR PRODUCTS, WE WILL
NOT BE ABLE TO MANUFACTURE OR MARKET OUR PRODUCTS.
None of our product candidates has received regulatory approval from the FDA.
Approval from the FDA is necessary to market pharmaceutical products in the
United States. Other countries have similar requirements.
The process that pharmaceuticals must undergo to receive necessary approval is
extensive, time-consuming and costly, and there is no guarantee that regulatory
authorities will approve any of our product candidates. FDA approval can be
delayed, limited or not granted for many reasons, including:
- a product candidate may not be safe or effective
- even if we believe data from preclinical testing and clinical
trials should justify approval, FDA officials may disagree
- the FDA might not approve our manufacturing processes or
facilities or the processes or facilities of our contract
manufacturers or raw material suppliers
- the FDA may change its approval policies or adopt new
regulations
- the FDA may approve a product candidate for indications that are
narrow, which may limit our sales and marketing activities
The process of obtaining approvals in foreign countries is subject to delay and
failure for the same reasons.
IF WE ARE NOT ABLE TO COMPLETE OUR CLINICAL TRIALS SUCCESSFULLY OR OUR CLINICAL
TRIALS ARE DELAYED, WE MAY NOT BE ABLE TO OBTAIN REGULATORY APPROVALS TO MARKET
OUR PRODUCTS.
Many of our research and development programs are at an early stage and clinical
testing is a long, expensive and uncertain process. We may not complete our
clinical trials on schedule, including our two multinational Phase III clinical
trials for Vitrase. Delays in patient enrollment in the trials may result in
increased costs, program delays or both, which could slow our product
development and approval process. Even if initial results of preclinical studies
or clinical trial results are positive, we may obtain different results in later
stages of drug development, including failure to show desired safety and
efficacy.
The clinical trials of any of our product candidates could be unsuccessful,
which would prevent us from commercializing the relevant product. Our failure to
develop safe and effective products would substantially impair our ability to
generate revenues and materially harm our business and financial condition.
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IF ALLERGAN DOES NOT PERFORM ITS DUTIES UNDER OUR AGREEMENTS, OUR ABILITY TO
COMMERCIALIZE VITRASE MAY BE SIGNIFICANTLY IMPAIRED.
We have entered into a collaboration with Allergan for Vitrase. If we obtain
regulatory approval for Vitrase, we will be dependent on Allergan for the
commercialization of Vitrase. The amount and timing of resources Allergan
dedicates to our collaboration is not within our control. Accordingly, any
breach or termination of our agreements by Allergan could delay or stop the
commercialization of Vitrase. Allergan may change its strategic focus, pursue
alternative technologies or develop competing products. Unfavorable developments
in our relationship with Allergan could have a significant adverse effect on us
and our stock price.
IF THE THIRD PARTIES THAT WE DEPEND UPON TO MANUFACTURE OUR PRODUCTS ARE NOT
ABLE TO SATISFY OUR REQUIREMENTS, OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION
EFFORTS COULD BE DELAYED OR STOPPED.
We have a supply agreement with Biozyme pursuant to which Biozyme supplies Prima
Pharm, our contract manufacturer, with all of our ovine hyaluronidase
requirements for use in our clinical trials. We then rely on Prima Pharm for
formulation and filling of dose specific vials of hyaluronidase. Biozyme is
currently our only source for highly purified hyaluronidase, which is extracted
from sheep in New Zealand.
To date, Prima Pharm has produced only small quantities of our product for use
in clinical trials. Prima Pharm may be unable to scale up production when
necessary or accurately and reliably manufacture commercial quantities of our
products at reasonable costs. Moreover, the manufacturing facilities of Prima
Pharm must comply with current Good Manufacturing Practices regulations, which
the FDA strictly enforces. Difficulties in our relationship with Biozyme or
Prima Pharm, or any other future contract manufacturer, could limit our ability
to provide sufficient quantities of our products for clinical trials and
commercial sales.
THE OUTBREAK OF FOOT-AND-MOUTH DISEASE IN EUROPE AND ELSEWHERE MAY
SIGNIFICANTLY INTERRUPT THE SUPPLY OF THE ACTIVE PHARMACEUTICAL INGREDIENT FOR
OUR PRODUCTS.
In February 2001, an outbreak of foot-and-mouth disease in the United Kingdom
(UK) led to governmental actions around the world to prevent the highly
contagious disease from spreading to animals in other countries. Such actions
have included temporarily prohibiting the importation and exportation of cattle,
sheep and other animals subject to the disease, and products derived from these
animals, to and from the UK and to and from other countries.
The active pharmaceutical ingredient in our product candidates is
hyaluronidase, which is extracted from sheep in New Zealand. Biozyme, the
company that processes hyaluronidase for us, is located in Wales and ships
hyaluronidase to our manufacturer, Prima Pharm, in San Diego, approximately
twice per month for formulation and filling of dose specific vials. These
shipments require an export permit from the Ministry of Agriculture, Fisheries
and Food (MAFF) of the UK. The MAFF has temporarily placed exportation of
processed hyaluronidase and other biological materials on hold because of the
foot-and-mouth disease outbreak. Before it will issue export permits for these
materials, including hyaluronidase, MAFF is requiring that the United States
Department of Agriculture (USDA) make a written request that permits be issued,
and the USDA has issued a permit request for our hyaluronidase. If UK
authorities do not issue permits for the export of processed hyaluronidase to
the United States, or do not do so in a timely manner, or if U.S. authorities do
not permit its importation, lengthy delays may occur in the shipment of our
active pharmaceutical ingredient to our manufacturer, Prima Pharm, which would
delay our on-going clinical studies and our business and financial condition
would be materially impaired.
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WE MAY NOT BE ABLE TO NEGOTIATE ADDITIONAL AGREEMENTS WITH STRATEGIC PARTNERS,
WHICH COULD LIMIT OUT ABILITY TO COMMERCIALIZE OUR PRODUCT CANDIDATES
We intend to enter into additional agreements with pharmaceutical companies or
others for marketing and other commercialization activities relating to some of
our product candidates. However, we may not be able to enter into additional
relationships and these relationships, if established, may not be commercially
successful.
WE MAY BE REQUIRED TO BRING LITIGATION TO ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY RESULT IN SUBSTANTIAL EXPENSE.
We rely on patents to protect our intellectual property rights. The strength of
this protection, however, is uncertain. In particular, it is not certain that:
- our patents and pending patent applications use technology that
we invented first
- we were the first to file patent applications for these
inventions
- others will not independently develop similar or alternative
technologies or duplicate our technologies
- any of our pending patent applications will result in issued
patents
- any patents issued to us will provide a basis for commercially
viable products, will provide us with any competitive advantages
or will not face third party challenges or be the subject of
further proceedings limiting their scope
We may become involved in interference proceedings in the U.S. Patent and
Trademark Office to determine the priority of our inventions. We could also
become involved in opposition proceedings in foreign countries challenging the
validity of our patents. In addition, costly litigation could be necessary to
protect our patent position. Patent law relating to the scope of claims in the
technology fields in which we operate is still evolving, and, consequently,
patent positions in our industry are generally uncertain. We may not prevail in
any lawsuit or, if we do prevail, we may not receive commercially valuable
remedies. Failure to protect our patent rights could harm us.
We also rely on trade secrets, unpatented proprietary know-how and continuing
technological innovation that we seek to protect with confidentiality agreements
with employees, consultants and others with whom we discuss our business. These
individuals may breach our confidentiality agreements and our remedies may not
be adequate to enforce these agreements. Disputes may arise concerning the
ownership of intellectual property or the applicability or enforceability of
these agreements, and we may not resolve these disputes in our favor.
Furthermore, our competitors may independently develop trade secrets and
proprietary technology similar to ours. We may not be able to maintain the
confidentiality of information relating to such products.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO ENGAGE IN COSTLY LITIGATION AND, IF WE ARE NOT SUCCESSFUL, COULD
CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.
Third parties may assert patent, trademark or copyright infringement or other
intellectual property claims against us based on their patents or other
intellectual property. We may be required to pay substantial damages, including
but not limited to treble damages, for past infringement if it is ultimately
determined that our products infringe a third party's intellectual property
rights. Even if infringement claims against us are without merit, defending a
lawsuit takes significant time, may be expensive and may divert management
attention from other business concerns. Further, we may be unable to sell our
products before we obtain a license from the owner of the relevant technology or
other intellectual property rights. If such a license is available at all, it
may require us to pay substantial royalties.
We are in negotiations with a third party for our acquisition of rights to
patent applications owned by such party related to our Keraform product in
development. If we are not successful in finalizing this acquisition, we may be
required to license these patent rights in order to commercialize our Keraform
product as currently planned. Such a license may not be available to us on
favorable terms, if at all. If such license is not available and we
commercialize our Keraform product in its current configuration, there is a
possibility that we could be sued for patent infringement should any patents
containing claims related to our Keraform product issue from these patent
applications.
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IF WE DO NOT RECEIVE THIRD-PARTY REIMBURSEMENT, OUR PRODUCTS MAY NOT BE ACCEPTED
IN THE MARKET.
Third-party payors are increasingly attempting to limit both the coverage and
the level of reimbursement of new drug products to contain costs. Consequently,
significant uncertainty exists as to the reimbursement status of newly approved
healthcare products. If we succeed in bringing one or more of our product
candidates to market, third-party payors may not establish adequate levels of
reimbursement for our products, which could limit their market acceptance.
WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE THAT COULD RESULT IN
PRODUCTS THAT ARE SUPERIOR TO THE PRODUCTS WE ARE DEVELOPING.
We have numerous competitors in the United States and abroad, including, among
others, major pharmaceutical and specialized biotechnology firms, universities
and other research institutions that may be developing competing products. Such
competitors may include Alcon Laboratories, Inc., Bausch & Lomb, Incorporated,
CIBA Vision (a unit of Novartis AG), and Eli Lilly and Company. These
competitors may develop technologies and products that are more effective or
less costly than our current or future product candidates or that could render
our technologies and product candidates obsolete or noncompetitive. Many of
these competitors have substantially more resources and product development,
manufacturing and marketing experience and capabilities than we do. In addition,
many of our competitors have significantly greater experience than we do in
undertaking preclinical testing and clinical trials of pharmaceutical product
candidates and obtaining FDA and other regulatory approvals of products and
therapies for use in healthcare.
WE MAY NOT DISCOVER NEW PRODUCT CANDIDATES IF HYALURONIDASE IS NOT SAFE AND
EFFECTIVE FOR NUMEROUS APPLICATIONS IN THE EYE.
A part of our strategy is to leverage our experience with hyaluronidase to
develop new product candidates. Hyaluronidase may not be safe and effective for
numerous applications in the eye. Our failure to develop new product candidates
could have an adverse effect on our business.
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS, AND INSURANCE AGAINST THESE CLAIMS
MAY NOT BE AVAILABLE TO US AT A REASONABLE RATE.
The coverage limits of our insurance policies may be inadequate to protect us
from any liabilities we might incur in connection with clinical trials or the
sale of our products. Product liability insurance is expensive and in the future
may not be available on acceptable terms or at all. A successful claim or claims
brought against us in excess of our insurance coverage could materially harm our
business and financial condition.
WE DEAL WITH HAZARDOUS MATERIALS AND GENERATE HAZARDOUS WASTES AND MUST COMPLY
WITH ENVIRONMENTAL LAWS AND REGULATIONS, WHICH CAN BE EXPENSIVE AND RESTRICT HOW
WE DO BUSINESS. WE COULD ALSO BE LIABLE FOR DAMAGES OR PENALTIES IF WE ARE
INVOLVED IN A HAZARDOUS MATERIAL OR WASTE SPILL OR OTHER ACCIDENT.
Our research and development work and manufacturing processes involve the use of
hazardous materials and waste, including chemical, radioactive and biological
materials. Our operations also produce hazardous wastes. We are subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of these materials and waste. In the event of a
hazardous material or waste spill or other accident, we could also be liable for
damages or penalties. In addition, we may be liable or potentially liable for
injury or contamination that results from our or a third party's use of these
materials, and our liability could exceed our total assets.
ITEM 2: PROPERTIES
We currently lease approximately 13,000 square feet of laboratory and office
space in Irvine, California. The current term of this lease expires on September
30, 2001 and may be renewed for another five year term. We believe that this
facility is adequate for our immediate needs. Additional space will be required,
however, as we expand our research and clinical development activities. We do
not foresee any significant difficulties in obtaining any required additional
facilities close to our current facility.
ITEM 3: LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the Nasdaq National Market under the symbol
"ISTA" on August 21, 2000. Prior to this date, there was no public market for
our common stock. The following table presents high and low sales prices of our
common stock, as reported on the Nasdaq National Market, for the periods
indicated since our initial public offering:
2000 High Low
---- ---- ---
Third quarter (beginning August 21, 2000) $14.563 $10.50
Fourth quarter $13.688 $10.05
As of March 15, 2001, there were approximately 174 shareholders of record of our
common stock.
We have never declared or paid any cash dividends on our common stock and do not
intend to pay any cash dividends on our common stock in the foreseeable future.
On August 25, 2000 we completed our initial public offering of 3,000,000 shares
of common stock at an initial public offering price of $10.50 per share with
gross proceeds of $31,500,000. Net proceeds, after a 7% underwriters discount
were $29,295,000. Additional expenses relating to the initial public offering,
other than the underwriters discount, amounted to $1,918,000. The managing
underwriters for the offering were CIBC World Markets, Prudential Vector
Healthcare and Thomas Weisel Partners LLC. The shares of common stock sold in
the offering were registered on Form S-1, as amended (File No. 333-34120). The
Securities and Exchange Commission initially declared the Registration Statement
effective on August 9, 2000. We subsequently filed two post-effective amendments
to the Registration Statement, the last of which was declared effective on
August 21, 2000.
In September 2000, the underwriters exercised their over-allotment option for an
additional 450,000 shares of common stock at the initial public offering price
of $10.50, less a 7% discount, resulting in net proceeds of $4,394,000.
The net proceeds from our initial public offering are primarily being used to
fund our clinical trials and preclinical research, with a particular focus on
Vitrase for the treatment of severe vitreous hemorrhage, and for general
corporate purposes, including working capital. We may use a portion of the net
proceeds to acquire or invest in technologies, products or businesses
complementary to our business. We are in negotiations with a third party for our
acquisition of rights to patent applications owned by such third party related
to our Keraform product candidate. We do not anticipate that the costs of
acquiring these rights will be material. None of the net offering proceeds of
ISTA have been or will be paid directly or indirectly to any director, officer,
general partner of ISTA or their associates, persons owning more than 10% or
more of any class of ISTA's equity securities, or an affiliate of ISTA.
During the year ended December 31, 2000, there were 707 shares of common stock
purchased under our 2000 Employee Stock Purchase Plan. The sale and issuance of
these securities were deemed to be exempt from registration under the Securities
Act of 1933, as amended in reliance upon Section 4(2) of the Securities Act of
1933, as amended. The recipients of securities represented their intentions to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the securities issued in such transactions. All recipients had adequate access,
through their relationship with ISTA, to information about us.
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ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to our consolidated
financial statements has been derived from our audited financial statements. The
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes included elsewhere in this
filing. The selected financial data in this section are not intended to replace
the consolidated financial statements.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Costs and expenses:
Research and development $ 16,200 $ 11,062 $ 7,523 $ 4,969 $ 1,828
General and administrative 6,455 3,240 2,147 1,949 1,405
-------- -------- -------- -------- --------
Total costs and expenses 22,655 14,302 9,670 6,918 3,233
-------- -------- -------- -------- --------
Loss from operations (22,655) (14,302) (9,670) (6,918) (3,233)
Interest income 848 69 133 251 208
Interest expense (50) (51) (87) (85) --
-------- -------- -------- -------- --------
Net loss (21,857) (14,284) (9,624) (6,752) (3,025)
Deemed dividend to preferred stockholders (19,245) -- -- -- --
-------- -------- -------- -------- --------
Net loss attributable to common stockholders $(41,102) $(14,284) $ (9,624) $ (6,752) $ (3,025)
======== ======== ======== ======== ========
Net loss per common share, basic and diluted $ (6.01) $ (9.50) $ (7.17) $ (5.28) $ (2.41)
======== ======== ======== ======== ========
Shares used in computing net loss per share,
basic and diluted 6,836 1,503 1,342 1,279 1,253
Pro forma net loss per common share, basic
and diluted $ (3.36) $ (1.95)
======== ========
Shares used in computing pro forma net loss
per common share, basic and diluted 12,236 7,329
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and short term investments $25,729 $ 709 $ 2,393 $ 5,896 $ 1,963
Working capital (deficit) 23,386 (4,993) (260) 4,820 1,639
Total assets 28,021 3,020 4,115 7,400 3,083
License fee received from Visionex -- 5,000 5,000 5,000 --
Other long term obligations 12 37 294 508 310
Total stockholders' equity (deficit) 24,564 (8,656) (4,053) 774 2,304
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the notes to those statements, which appear elsewhere
in this Form 10-K. The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs, including without limitation
forward-looking statements regarding trends in operating expenses, the adequacy
of our capital reserves and our future need for additional capital. Our actual
results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below and elsewhere in this report,
particularly in "Risk Factors".
OVERVIEW
ISTA was founded to discover, develop and market new remedies for diseases and
conditions of the eye. Our product development efforts are focused on using
highly purified formulations of the enzyme hyaluronidase to treat diseases and
conditions such as vitreous hemorrhage, diabetic retinopathy, corneal
opacification and keratoconus. Our lead product candidate, Vitrase, currently in
Phase III clinical trials, is a proprietary drug for the treatment of severe
vitreous hemorrhage.
We currently have no products available for sale. We have incurred losses since
inception and had an accumulated deficit through December 31, 2000 of $76.9
million. Our losses have resulted primarily from research and development
activities, including clinical trials, and related general and administrative
expenses. We expect to continue to incur operating losses for the foreseeable
future as we continue our research and development and clinical testing
activities, and seek regulatory approval for our product candidates.
In March 2000, we completed the acquisition of Visionex, a Singapore
corporation, which has been conducting a Phase II clinical trial of Vitrase in
Singapore. Visionex was a related party through common ownership by some of our
stockholders.
In March 2000, we entered into a collaboration with Allergan, under which
Allergan will be responsible for the marketing, sale and distribution of Vitrase
in the United States and all international markets, except Mexico and Japan. We
will be dependent on the success of Allergan in commercializing Vitrase in these
markets. Our principal sources of revenue from this collaboration and the
commercialization of Vitrase will be milestone, royalty and profit-sharing
payments received from Allergan. Under the terms of the collaboration, we are
responsible for the manufacture of Vitrase and for supplying all of Allergan's
requirements for Vitrase. If we are successful in obtaining regulatory approval
for Vitrase and Allergan achieves significant sales of the product, our
aggregate manufacturing costs will increase.
RESULTS OF OPERATIONS
Years Ended December 31, 2000, 1999, and 1998
Research and development expenses. Research and development expenses were $16.2
million in 2000, $11.1 million in 1999 and $7.5 million in 1998. The $5.1
million increase in 2000 was primarily attributable to expansion of our
preclinical and clinical development activities, including two Phase III
clinical trials of Vitrase for treatment of severe vitreous hemorrhage, a pilot
study of Vitrase for the treatment of diabetic retinopathy and a Phase IIb study
of Keratase for the treatment of corneal opacification. The $3.6 million
increase in 1999 was attributable to the expenses associated with the Phase III
clinical trials of Vitrase which commenced in late 1998
General and administrative expenses. General and administrative expenses were
$6.5 million in 2000, $3.2 million in 1999 and $2.1 million in 1998. The
increase in 2000 was primarily attributable to non-cash compensation expense
related to stock option grants, which totaled $3.3 million in 2000 compared to
$1.3
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million in 1999. The increase in general and administrative expenses in 1999 was
primarily attributable to increasing our staff in support of our expanding
operations.
Stock-based compensation. Deferred compensation for stock options granted to
employees and directors is the difference between the exercise price and the
estimated fair value of the underlying common stock for financial reporting
purposes on the date the options were granted. Deferred compensation is included
as a component of stockholders' equity and is being amortized in accordance with
SFAS Interpretation No. 28 over the vesting period of the related options, which
is generally four years.
Compensation for stock options granted to non-employees has been determined in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and
Emerging Issues Task Force Consensus No. 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling Goods or Services, as the fair value of the equity
instrument issued and is periodically remeasured as the underlying options vest.
Stock option compensation for non-employees is recorded as the related services
are rendered and the value of compensation is periodically remeasured as the
underlying options vest.
For the year ended December 31, 2000, we granted stock options to employees to
purchase 687,222 shares of common stock at a weighted average exercise price of
$3.48 per share. We anticipate recording deferred compensation expense of
approximately $1.6 million, $746,000 and $220,000 for the years ended December
31, 2001, 2002 and 2003 respectively, related to these option grants.
In connection with the grant of stock options to employees and directors, we
recorded deferred compensation of approximately $3,535,000, $3,538,000 and
$12,000 during the years ended December 31, 2000, 1999 and 1998, respectively,
and recorded amortization of $3,165,000, $1,324,000 and $11,000 during the years
ended December 31, 2000, 1999 and 1998, respectively.
Interest income. Interest income was $848,000 in 2000, $69,000 in 1999 and
$133,000 in 1998. The increase in interest income in 2000 over the prior years
was directly attributable to higher cash balance as a result of our financing
activities.
Interest expense. Interest expense was approximately $50,000 in 2000, $51,000 in
1999 and $87,000 in 1998. Most of these interest expenses were incurred in
connection with our capital leases.
Deemed dividend. During the year ended December 31, 2000, we acquired Visionex
and accounted for the acquisition under the purchase method of accounting. At
the time of the acquisition, we recorded $4.4 million of tangible assets
acquired and recognized a deemed dividend of $19.2 million for the excess of the
extended value of the shares issued over the net tangible assets acquired.
Income taxes. We incurred net operating losses in 2000, 1999 and 1998 and
consequently did not pay any federal, state or foreign income taxes. At December
31, 2000, we had federal and California net operating loss carryforwards of
approximately $41.2 million and $34.0 million, respectively, which we have fully
reserved due to the uncertainty of realization. Our federal tax loss
carryforwards will begin to expire in 2007, unless previously utilized.
Approximately $502,000 of the California tax loss carryforwards expired in 2000
and the remaining tax loss carryforwards will continue to expire in 2001, unless
previously utilized. We also have federal and California research tax credit
carryforwards of $2.0 million and $1.2 million, respectively, which will begin
to expire in 2010, unless previously utilized.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of ISTA's unaudited quarterly
operating results for each of the last eight quarters in the period ended
December 31, 2000. This data has been derived from our unaudited interim
financial statements which, in our opinion, have been prepared on substantially
the same basis as the audited financial statements contained elsewhere in this
report and include all normal recurring adjustments necessary for a fair
presentation of the financial information for the periods presented. These
unaudited quarterly results should be read in conjunction with ISTA's financial
statements and notes thereto included elsewhere in this report. The operating
results in any quarter are not necessarily indicative of the results that may
be expected for any future period (in 000's except earnings per share).
QUARTER ENDED
---------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2000 2000 2000 2000 1999 1999 1999 1999
---------------------------------------------------------------------------------------
Costs and Expenses:
Research & Development $ 4,545 $ 4,075 $ 4,558 $ 3,023 $ 3,464 $ 2,341 $ 3,326 $ 1,931
General & Administrative 1,654 1,590 1,711 1,500 1,861 458 491 430
Total costs & expenses 6,199 5,665 6,269 4,523 5,325 2,799 3,817 2,361
Interest income/expense (net) 592 122 118 (33) (4) 15 13 (6)
Net loss (5,607) (5,543) (6,151) (4,556) (5,329) (2,784) (3,804) (2,367)
Deemed dividend for preferred
stockholders -- -- -- (19,245) -- -- -- --
Net loss attributable to common
stockholders $(5,607) $(5,543) $(6,151) $(23,801) $(5,329) $(2,784) $(3,804) $(2,367)
Net loss per common share, basic
and diluted $ (0.36) $ (0.70) $ (3.00) $ (13.10) $ (3.40) $ (1.84) $ (2.58) $ (1.63)
Research & development expenses. During 2000, our quarterly research and
development expenses increased due to the expansion of our preclinical and
clinical development activities, particularly in the last three quarters of the
year due to concurrent clinical studies, including two Phase III clinical trials
of Vitrase for the treatment of severe vitreous hemorrhage, a pilot study of
Vitrase for the treatment of diabetic retinopathy and a Phase IIb study of
Keratase for the treatment of corneal opacification. In the fourth quarter of
2000, we incurred additional expenses over levels previously planned. These
expenses were incurred in connection with our Phase III Vitrase studies and
consists of costs associated with activities provided by contract research
organizations and costs associated with patient enrollment activities. We
anticipate that expenses in connection with Phase III Vitrase studies associated
with activities provided by contract research organizations and patient
enrollment will increase over the next several quarterly periods. In addition,
and in connection with our preparations for submission of a New Drug Application
for Vitrase, we anticipate an increase in expenses and expenditures associated
with our manufacturing activities. In particular, we will need to purchase
equipment and incur certain expenses in order to improve the manufacturing
operations of our contract manufacturers.
General & administrative expenses. Our quarterly general and administrative
expenses increased in 2000 primarily as a result of non-cash compensation
related to stock option grants. We anticipate that our quarterly general and
administrative expenses for 2001 will approximate the quarterly expenses in
2000. We anticipate that expenses in connection in support of our expanding
operations and expenses associated with requirements as a public reporting
company will offset a decrease in non-cash compensation expenses related to
stock option grants.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, we had approximately $25.7 million in cash and
short-term investments and working capital of $23.4 million.
We have financed our operations since inception primarily through private sales
of our preferred stock and the sale of our common stock in our initial public
offering. We received net proceeds of $10.0 million from the private sale of
preferred stock in March 2000 and $31.7 million from our initial public offering
in August 2000.
During January and February 2000, we borrowed an aggregate of $1.3 million from
certain of our stockholders. We repaid this amount, together with accrued
interest, in March 2000.
During 2000 we used $20.8 million of cash for operations principally as a result
of the net loss of $21.9 million partially offset by the non-cash compensation
expense of approximately $3.2 million. In 1999, we used $10.2 million of cash
for operations principally as a result of the net loss of $14.3 million offset
by a non-cash compensation expense of approximately $1.3 million and an increase
in accrued expenses of $2.9 million related to clinical trials. We used
approximately $7.8 million of cash for operations in 1998, principally as a
result of the net loss of $9.6 million partially offset by an increase in
accrued expenses of $1.8 million related to our clinical trial activities.
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Net cash provided by financing activities totaled $41.4 million during 2000
compared to $8.7 million in 1999 and $4.6 million in 1998. The increase in net
cash provided by financing activities in 2000 is primarily attributable to the
completion of our initial public offering in August 2000, with net proceeds of
$31.7 million, and $10 million from the private sale of preferred stock in March
2000.
Due to expenses incurred during the fourth quarter of 2000 and currently
anticipated increases in overall expenses in 2001 over levels previously
planned, we now anticipate that our cash on hand will be sufficient to fund our
operations and capital expenditure needs for approximately the next fifteen
months. During this period, we plan to allocate our capital resources primarily
to the development of our lead product candidate, Vitrase for the treatment of
severe vitreous hemorrhage. We will need to raise additional funds to continue
the development and commercialization of Vitrase for severe vitreous
hemorrhage, and further development of our other product candidates, beyond
this period. This additional financing may not be available when needed or, if
available, may not be on terms favorable to us or to our stockholders.
Insufficient funds may require us to further delay, scale back or eliminate
some or all of our product development efforts or may limit our ability to
operate as a going concern. If additional funds are raised by issuing equity
securities, substantial dilution to existing stockholders may result.
Our actual future capital requirements will depend on many factors, including
the following:
- the rate of progress of our research and development programs
- the results of our clinical trials
- the time and expense necessary to obtain regulatory approvals
- our ability to establish and maintain collaborative
relationships
- receiving milestone payments from Allergan
- competitive, technological, market and other developments
Future capital requirements will also depend on the extent to which we acquire
or invest in businesses, products and technologies.
VISIONEX ACQUISITION
Visionex Pte Ltd. was established in 1997 under the laws of Singapore to engage
in clinical, regulatory and marketing activities. During 1997, Visionex obtained
from us the exclusive rights to register, import, market, sell and distribute
Vitrase and Keraform in East Asian markets, excluding Japan and Korea, for which
Visionex paid us $5.0 million. Although we had no ownership interest in
Visionex, their incorporation was funded concurrently with our June 27, 1997
Series C preferred stock financing round at which time three of the Visionex
investors were already existing shareholders of ISTA. Upon the formation of
Visionex, we had no ownership interest in Visionex, but investors owning 87.3%
of ISTA also owned 62.5% of Visionex. At March 8, 2000, investors who owned 66%
of ISTA shares controlled 100% of Visionex shares. In addition, three of the
five board members of Visionex at December 31, 1999 were also board members of
ISTA.
Upon incorporation of Visionex, we entered into a Call Option Agreement with
Visionex and its shareholders whereby we could have required the shareholders to
exchange their outstanding shares of Visionex stock for our stock. The Visionex
shares would have been exchanged at a rate ranging, depending upon the annual
revenues of Visionex, as defined in the agreement, from 1,668,662 up to
2,458,786 shares of our common stock or, if we had not yet completed an initial
public offering, our Series C preferred stock. The call option could have been
exercised by us at any time during the two-year period beginning June 27, 2000,
but could have been deferred for a period of up to two years by a majority of
the holders of the Visionex shares.
The Call Option Agreement also provided for a put option whereby each of the
Visionex shareholders could have required us to purchase the outstanding
preference shares of Visionex held by such shareholder. The per share purchase
price to be paid by us under the put option was 0.1689 shares of our common
stock or, if we had not yet completed an initial public offering, our Series C
preferred stock (up to a maximum of 2,252,694 shares). The put option was
exercisable at any time in the three-year period beginning June 27, 1999.
On March 8, 2000, we negotiated an agreement with the Visionex shareholders and
issued 3,319,363 shares of our Series C preferred stock, convertible into
2,458,787 shares of our common stock, to acquire all of the outstanding capital
stock of Visionex. We assigned a fair value of $11.70 per share to the 3,319,363
shares of Series C preferred stock issued to effect the acquisition, at which
time we recorded a deemed dividend of $19.2 million to recognize the excess of
the value of the shares issued over the net assets acquired.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which we
adopted on January 1, 2001. SFAS No. 133 sets forth a comprehensive and
consistent standard for the recognition of derivatives and hedging activities.
SFAS No. 133 is not anticipated to have an impact on our results of operations
or financial condition when adopted as we currently hold no derivative financial
instruments and do not currently engage in hedging activities.
In March 2000, the FASB issued Financial Interpretation No. 44 (FIN 44)
"Accounting for Certain Transactions Involving Stock Compensation -- an
interpretation of APB Opinion No. 25". FIN 44 clarifies the definition of
employee for purposes of applying Accounting Practice Board Opinion No. 25,
"Accounting for Stock Issued to Employees", the criteria for determining whether
a plan qualifies as a noncompensatory plan, the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 became effective on July 1, 2000, but certain conclusions in
FIN 44 cover specific events that occur after either December 15, 1998 or
January 12, 2000. Management believes that FIN 44 will not have a material
effect on our financial position or results of operations.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities. The average duration of
all of our investments in 2000 was less than one year. Due to the short-term
nature of these investments, we believe we have no material exposure to interest
rate risk arising from our investments. A hypothetical 100 basis point adverse
move in interest rates along the entire interest rate yield curve would not
materially affect the fair market value of our interest sensitive financial
investments. Declines in interest rates over time will, however, reduce our
investment income, while increases in interest rates over time will increase our
interest expense.
We have operated primarily in the United States and have had no sales to date.
Accordingly, we have not had any significant exposure to foreign currency rate
fluctuations. Visionex's functional currency is the Singapore dollar and a
portion of Visionex's business is conducted in currencies other than the
Singapore dollar. However, Visionex's operations have historically been
insignificant and we currently plan for the orderly cessation of Visionex
operations. As a result, currency fluctuations between the Singapore dollar and
the currencies in which Visionex does business will cause foreign currency
translation gains and losses. We do not expect our foreign currency translation
gains or losses to be material. We do not currently engage in foreign exchange
hedging transactions to manage our foreign currency exposure.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The consolidated financial statements and supplementary data required by this
item are set forth on the pages indicated in Item 14 (a).
ITEM 9: CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable
28
29
PART III
ITEM 10: EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of our executive
officers:
NAME AGE POSITION
- ---- --- --------
Edward H. Danse............................... 48 President, Chief Executive Officer and Director
J. C. MacRae.................................. 48 Executive Vice President, Chief Operating Officer and Chief Financial
Officer
Hampar L. Karageozian......................... 60 Senior Vice President, Discovery and Chief Technical Officer
Marvin J. Garrett............................. 50 Vice President, Development
William S. Craig, Ph.D........................ 50 Vice President, Preclinical Research and Development
David R. Waltz................................ 49 Vice President, Finance
Lisa R. Grillone, Ph.D........................ 51 Vice President, Clinical and Medical Affairs
EDWARD H. DANSE has served as our President and Chief Executive Officer since
June 1997. From 1988 to 1997, Mr. Danse held various senior management positions
at Allergan including President of the Asia Pacific Region from 1996 to 1997.
Prior to 1988, he served in various management positions at Bausch & Lomb
Incorporated and the Cooper Companies, Inc., both ophthalmic companies. Mr.
Danse received a Masters in International Management from the American Graduate
School of International Management, Thunderbird.
J. C. MACRAE has served as our Chief Financial Officer since July 1998 and was
named Executive Vice President and Chief Operating Officer in January 2000. From
1992 until its acquisition by Urohealth Systems in September 1997, Mr. MacRae
was Vice President and Chief Financial Officer for Imagyn Medical, Inc., a
manufacturer of proprietary surgical products for the obstetrics and gynecology
market. Mr. MacRae received an M.B.A. from the California State University at
Fullerton.
HAMPAR L. KARAGEOZIAN has served as our Senior Vice President, Discovery and
Chief Technical Officer since 1996 and served as our Vice President of Research
and Development from 1992 to 1996. From 1970 to 1992, Mr. Karageozian served in
various research and development positions at Allergan, last serving as Senior
Vice President of Research & Development for Allergan Optical. Mr. Karageozian
received a M.Sc. in Nutritional Biochemistry and Metabolism from the
Massachusetts Institute of Technology.
MARVIN J. GARRETT has served as our Vice President, Development since June 1999.
From May 1994 to May 1999, Mr. Garrett was Vice President, Regulatory Affairs
and Clinical Research for Xoma. From 1990 to 1994, he was President and General
Manager of Coopervision Pharmaceutical, a division of the Cooper Companies, Inc.
Mr. Garrett received a B.S. in Microbiology from California State University
Long Beach.
WILLIAM S. CRAIG, PH.D. has served as our Vice President, Preclinical Research
and Development since March 2000. From 1996 to December 1999, Dr. Craig was Vice
President of Research and Development for Alpha Therapeutics Corporation, a
biotechnology company. From 1988 to 1996 he was Senior Director Research and
Development for Telios Pharmaceuticals, Inc., a biotechnology company. Dr. Craig
received a Ph.D. in chemistry from the University of California, San Diego.
DAVID R. WALTZ has served as Vice President, Finance since June 2000. From 1981
to 1999, Mr. Waltz served in various finance capacities with Beckman-Coulter,
Inc., last serving as Finance Director for the Far East and Latin America
operations. Mr. Waltz received an M.B.A. from California State University at
Northridge.
29
30
LISA R. GRILLONE, PH.D. has served as our Vice President, Clinical Research and
Medical Affairs since August 2000. From 1990 to July 2000, Dr. Grillone served
in various drug development positions with ISIS Pharmaceuticals, Inc., last
serving as Executive Director, Intellectual Property Licensing. Dr. Grillone
received a Ph.D. in Cell Biology and Anatomy from New York University.
The information concerning our directors required by this item will be contained
in our definitive Proxy Statement with respect to our Annual Meeting of
Stockholders, under the caption "Election of Directors", and is hereby
incorporated by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item will be contained in our definitive Proxy
Statement with respect to our Annual Meeting of Stockholders, under the caption
"Executive Compensation," and is hereby incorporated by reference.
ITEM 12: SECURITY OWNERSHIPS OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in our definitive Proxy
Statement with respect to our Annual meeting of Stockholders, under the caption
"Security Ownership of Certain Beneficial Owners and Management," and is
incorporated by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in our definitive Proxy
Statement with respect to our Annual Meeting of Stockholders, under the caption
"Certain Transactions," and is hereby incorporated by reference.
30
31
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this report.
CONSOLIDATED FINANCIAL STATEMENTS OF ISTA PHARMACEUTICALS, INC.
Report of Ernst & Young LLP, Independent Auditors ............................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 .................... F-3
Consolidated Statements of Operations for the years ended December 31, 2000,
1999 and 1998 and the period from February 13, 1992 (inception) to
December 31, 2000 ........................................................... F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the period from February 13, 1992
(inception) to December 31, 2000 ........................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998 and the period from February 13, 1992
(inception) to December 31, 2000 ............................................ F-8
Notes to Consolidated Financial Statements ...................................... F-9
(b) REPORT ON FORM 8-K
The Company filed the following reports on Form 8-K during the first quarter of
2001:
Date of Filing Description
- -------------- -----------
February 22, 2001 Registration of shares of the Company's common stock to be
issued pursuant to the Company's 1993 Stock Plan,
2000 Stock Plan and 2000 Employee Stock Purchase Plan
31
32
(c) EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1* Amended and Restated Certificate of Incorporation, currently in
effect
3.2* Bylaws of the registrant currently in effect
4.1* Specimen common stock certificate
10.1* Amended and Restated Investors Rights Agreement dated as of
March 29, 2000
10.2* 1993 Stock Plan and forms of agreements thereunder
10.3* 2000 Stock Plan and forms of agreements thereunder
10.4* 2000 Employee Stock Purchase Plan
10.5* Form of Indemnification Agreement with executive officers and
directors
10.6* Clinical Development Agreement between Covance, Inc. and the
registrant dated as of October 28, 1998, as amended
10.7* Agreement between CroMedica Global Inc. and the registrant as of
September 8, 1998
10.8* Agreement between CroMedica Global Inc. and the registrant as of
May 19, 1999
10.9* Lease between the registrant and Aetna Life Insurance Company
dated September 13, 1996 for leased premises located at Suite
100, 15279 Alton Parkway, Irvine, California
10.10* Lease between the registrant and Aseguradora Mexicana, S.A.
dated December 30, 1993 for leased premises located at Paseo de
los Heroes No. 10, 105 in the development known as "Desarrollo
Urbano del Rio Tijuana" in Tijuana, B.C., Mexico
10.11* Equipment Financing Agreement between Lease Management Services,
Inc. and the registrant as of October 7, 1996, as amended
10.12* Agreement between Visionex Pte. Ltd. and the registrant as of
June 1997
10.13* Distributor Agreement between Laboratories Sophia S.A. de C.V.
and the registrant as of April 23, 1998
10.14* Manufacture and Supply Agreement between Prima Pharm, Inc. and
the registrant as of December 19, 1996
10.15* Supply Agreement between Biozyme Laboratories, Ltd. and the
registrant as of September 23, 1999
10.16*+ License Agreement between Allergan Sales, Inc., Allergan Sales,
Ltd. and the registrant as of March 29, 2000
10.17*+ Supply Agreement between Allergan Sales, Inc., Allergan Sales,
Ltd. and the registrant as of March 29, 2000
10.18* Series D Preferred Stock Purchase Agreement between Allergan
Pharmaceuticals (Ireland) Ltd., Inc. and registrant, dated as of
March 29, 2000
10.19* Call Option Agreement between Visionex Pte. Ltd. and the
registrant as of June 27, 1997
10.20 Amendment No. 1 to Contract Clinical Research Agreement with
CroMedica Global, Inc., dated May 19, 1999
10.21 Amendment No. 2 to Contract Clinical Research Agreement with
CroMedica Global, Inc., dated May 19, 1999
21.1* Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (contained in the signature page to this
Report)
- -----------
* Incorporated by reference to the Registration Statement on Form S-1 and
all amendments thereto filed with the Securities and Exchange Commission
on April 5, 2000 (File No. 333-34120). The Securities and Exchange
Commission initially declared the Registration Statement effective on
August 9, 2000. ISTA subsequently filed two post-effective amendments to
the Registration Statement, the last of which was declared effective on
August 21, 2000.
+ Confidential treatment requested and received as to certain portions.
These exhibits are incorporated by reference to the Registration
Statement on Form S-1 and all amendments thereto filed with the
Securities and Exchange Commission on April 5, 2000 (File No.
333-34120). The Securities and Exchange Commission initially declared
the Registration Statement effective on August 9, 2000. ISTA
subsequently filed two post-effective amendments to the Registration
Statement, the last of which was declared effective on August 21, 2000.
32
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form 10-K and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, State of
California, on March 29, 2001.
By:/s/ Edward H. Danse
-------------------------------------
Edward H. Danse
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints J.C. MacRae
as his attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any amendments to this Form 10-K, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Edward H. Danse President, Chief Executive Officer and Director March 28, 2001
- ------------------------------------
Edward H. Danse
/s/ J.C. MacRae Executive Vice President, Chief Operating Officer and March 28, 2001
- ------------------------------------ Chief Financial Officer
J.C. MacRae
Chairman of the Board March __, 2001
- ------------------------------------
Rober B. McNeil, Ph.D.
/s/ David E. Collins Director March 28, 2001
- ------------------------------------
David E. Collins
/s/ Brian H. Dovey Director March 28, 2001
- ------------------------------------
Brian H. Dovey
/s/ George M. Lasezkay Director March 29, 2001
- ------------------------------------
George M. Lasezkay
/s/ Benjamin F. McGraw III Director March 28, 2001
- ------------------------------------
Benjamin F. McGraw III
Director March __, 2001
- ------------------------------------
Charles H. May, O.D.
/s/ John H. Parrish Director March 29, 2001
- ------------------------------------
John H. Parrish
/s/ Wayne I. Roe Director March 28, 2001
- ------------------------------------
Wayne I. Roe
33
34
ISTA PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors ............................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 .................... F-3
Consolidated Statements of Operations for the years ended December 31, 2000,
1999 and 1998 and the period from February 13, 1992 (inception) to
December 31, 2000 ......................................................... F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the period from February 13, 1992
(inception) to December 31, 2000 ........................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998 and the period from February 13, 1992
(inception) to December 31, 2000 ........................................... F-8
Notes to Consolidated Financial Statements ...................................... F-9
F-1
35
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ISTA Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of ISTA
Pharmaceuticals, Inc. (a development stage company) as of December 31, 2000 and
1999 and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2000, and for the period from February 13, 1992 (inception) to
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ISTA
Pharmaceuticals, Inc. (a development stage company) at December 31, 2000 and
1999, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2000, and for the period
from February 13, 1992 (inception) to December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
February 2, 2001
F-2
36
ISTA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
DECEMBER 31,
-------------------------
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 8,772 $ 709
Short-term investments 16,957 --
Advanced payments -- clinical trials 433 877
Other current assets 669 59
--------- ---------
Total current assets 26,831 1,645
Property and equipment, net 912 984
Note receivable from officer 162 152
Deposits and other assets 116 239
--------- ---------
$ 28,021 $ 3,020
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 606 $ 823
Accrued compensation and related expenses 364 74
Accrued expenses -- clinical trials 1,241 4,783
Other accrued expenses 1,219 208
Current portion of obligation under capital lease 15 250
Notes payable to stockholders -- 500
--------- ---------
Total current liabilities 3,445 6,638
Obligation under capital lease -- 15
Deferred rent 12 23
License fee received from Visionex -- 5,000
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, no par value; 24,820,688, shares authorized at -- 25,496
December 31, 1999; 7,156,214 shares issued and outstanding at December 31, 1999;
liquidation preference $25,620,870 at December 31, 1999
Common stock, $0.001 par value; 100,000,000 and 32,750,000 shares authorized at 15 2
December 31, 2000 and 1999, respectively; 15,419,099 and 1,717,758 shares issued
and outstanding at December 31, 2000 and 1999, respectively
Additional paid-in capital 103,942 3,889
Deferred compensation (2,585) (2,215)
Accumulated other comprehensive income 122 --
Deficit accumulated during the development stage (76,930) (35,828)
--------- ---------
Total stockholders' equity (deficit) 24,564 (8,656)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 28,021 $ 3,020
========= =========
See accompanying notes.
F-3
37
ISTA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
FOR THE PERIOD FROM
FEBRUARY 13, 1992
YEARS ENDED DECEMBER 31, (INCEPTION) TO
----------------------------------------------- DECEMBER 31,
2000 1999 1998 2000
----------- ----------- ----------- -------------------
Costs and expenses:
Research and development $ 16,200 $ 11,062 $ 7,523 $ 42,942
General and administrative 6,455 3,240 2,147 15,991
----------- ----------- ----------- -----------
Total costs and expenses 22,655 14,302 9,670 58,933
----------- ----------- ----------- -----------
Loss from operations (22,655) (14,302) (9,670) (58,933)
Interest income 848 69 133 1,588
Interest expense (50) (51) (87) (295)
----------- ----------- ----------- -----------
Net loss (21,857) (14,284) (9,624) (57,640)
Deemed dividend for preferred stockholders (19,245) -- -- (19,245)
----------- ----------- ----------- -----------
Net loss attributable to common stockholders $ (41,102) $ (14,284) $ (9,624) $ (76,885)
=========== =========== =========== ===========
Net loss per common share, basic and diluted $ (6.01) $ (9.50) $ (7.17)
=========== =========== ===========
Shares used in computing net loss per common
share, basic and diluted 6,835,587 1,502,807 1,342,045
=========== =========== ===========
See accompanying notes.
F-4
38
ISTA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM FEBRUARY 13, 1992 (INCEPTION) TO DECEMBER 31, 2000
(in thousands, except share and per share data)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
Issuance of Series A preferred stock at $1.00 per
share for cash 295,000 $ 295 -- $ --
Issuance of common stock at $.0.32 to $.180 per
share for cash -- -- 950,000 1
Issuance of common stock at $.0376 per share for
intellectual property -- -- 133,333 --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1992 295,000 295 1,083,333 1
Issuance of Series A preferred stock at $1.00 per
share for cash 539,375 539 -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1993 834,375 834 1,083,333 1
Issuance of common stock at $.21 per share for -- -- 133,333 --
cash
Issuance of common stock at $.21 per share for
services -- -- 5,404 --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1994 834,375 834 1,222,070 1
Issuance of Series A preferred stock at $1.00 per
share for cash 1,128,531 1,129 -- --
Issuance of Series B preferred stock at $2.75 per share
for cash and in exchange for outstanding note
payable, net of issuance costs of $15,548 1,955,555 5,362 -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1995 3,918,461 7,325 1,222,070 1
Issuance of common stock upon exercise of options -- -- 44,446 1
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1996 3,918,461 7,325 1,266,516 2
Issuance of Series C preferred stock at $5.63 per
share for cash, net of issuance costs of $66,735 947,295 5,267 -- --
Issuance of common stock upon exercise of options -- -- 51,852 --
Repurchase and retirement of Series A preferred stock (11,153) (11) -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
PREFERRED AND
COMMON STOCK
ADDITIONAL SUBSCRIBED
PAID-IN -------------------------- SUBSCRIPTIONS
CAPITAL SHARES AMOUNT RECEIVABLE
---------- ---------- ---------- -------------
Issuance of Series A preferred stock at $1.00 per
share for cash -- -- $ -- $
Issuance of common stock at $.0.32 to $.180 per
share for cash 59 -- -- --
Issuance of common stock at $.0376 per share for
intellectual property 5 -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1992 64 -- -- --
Issuance of Series A preferred stock at $1.00 per
share for cash -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1993 64 -- -- --
Issuance of common stock at $.21 per share for 27 -- -- --
cash
Issuance of common stock at $.21 per share for
services 1 -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1994 92 -- -- --
Issuance of Series A preferred stock at $1.00 per
share for cash -- -- -- --
Issuance of Series B preferred stock at $2.75 per share
for cash and in exchange for outstanding note
payable, net of issuance costs of $15,548 -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1995 92 -- -- --
Issuance of common stock upon exercise of options 8 -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1996 100 -- -- --
Issuance of Series C preferred stock at $5.63 per
share for cash, net of issuance costs of $66,735 -- -- -- --
Issuance of common stock upon exercise of options 11 -- -- --
Repurchase and retirement of Series A preferred stock -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
OTHER DURING THE STOCKHOLDERS'
DEFERRED COMPREHENSIVE DEVELOPMENT EQUITY
COMPENSATION INCOME STAGE (DEFICIT)
------------ ------------- ----------- -------------
Issuance of Series A preferred stock at $1.00 per
share for cash $ -- $-- $ 295
Issuance of common stock at $.0.32 to $.180 per
share for cash -- -- -- 60
Issuance of common stock at $.0376 per share for
intellectual property -- -- -- 5
Net loss -- -- (121) (121)
---------- ---------- ---------- ----------
Balance at December 31, 1992 -- -- (121) 239
Issuance of Series A preferred stock at $1.00 per
share for cash -- -- -- 539
Net loss -- -- (471) (471)
---------- ---------- ---------- ----------
Balance at December 31, 1993 -- -- (592) 307
Issuance of common stock at $.21 per share for -- -- -- 27
cash
Issuance of common stock at $.21 per share for
services -- -- -- 1
Net loss -- -- (619) (619)
---------- ---------- ---------- ----------
Balance at December 31, 1994 -- -- (1,211) (284)
Issuance of Series A preferred stock at $1.00 per
share for cash -- -- -- 1,129
Issuance of Series B preferred stock at $2.75 per share
for cash and in exchange for outstanding note
payable, net of issuance costs of $15,548 -- -- -- 5,362
Net loss -- -- (887) (887)
---------- ---------- ---------- ----------
Balance at December 31, 1995 -- -- (2,098) 5,320
Issuance of common stock upon exercise of options -- -- -- 9
Net loss -- -- (3,025) (3,025)
---------- ---------- ---------- ----------
Balance at December 31, 1996 -- -- (5,123) 2,304
Issuance of Series C preferred stock at $5.63 per
share for cash, net of issuance costs of $66,735 -- -- -- 5,267
Issuance of common stock upon exercise of options -- -- -- 11
Repurchase and retirement of Series A preferred stock -- -- (45) (56)
Net loss -- -- (6,752) (6,752)
---------- ---------- ---------- ----------
F-5
39
ISTA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM FEBRUARY 13, 1992 (INCEPTION) TO DECEMBER 31, 2000 (CONTINUED)
(in thousands, except share and per share data)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- --------- --------- ----------
Balance at December 31, 1997 4,854,603 12,581 1,318,368 2 111
Issuance of Series C preferred stock and warrants at
$5.63 per share in exchange for conversion of
bridge loans of $1,000,000
and cash, net of issuance costs of $43,676 844,166 4,709 -- -- --
Preferred and common stock subscribed -- -- -- --
Issuance of common stock for exercisable options -- -- 21,913 -- 6
Issuance of common stock at $.76 per share for cash -- -- 93,881 -- 71
Deferred compensation related to stock options -- -- -- -- 12
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1998 5,698,769 17,290 1,434,162 2 200
Issuance of Series C preferred stock and warrants at
$5.63 per share in exchange for conversion of
bridge loans and cash, net of issuance costs
of $41,929 1,235,894 6,959 -- -- --
Issuance of preferred and common stock subscribed 221,551 1,247 24,638 -- 19
Issuance of common stock for exercisable options -- -- 206,835 -- 93
Issuance of common stock at $.76 per share for cash -- -- 52,123 -- 39
Deferred compensation related to stock options -- -- -- -- 3,538
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
--------- --------- --------- --------- ---------
PREFERRED AND
COMMON STOCK ACCUMULATED
SUBSCRIBED OTHER
------------------------- SUBSCRIPTIONS DEFERRED COMPRESSIVE
SHARES AMOUNT RECEIVABLE COMPENSATION INCOME
--------- --------- ------------- ------------ ------------
Balance at December 31, 1997 -- -- -- -- --
Issuance of Series C preferred stock and warrants at
$5.63 per share in exchange for conversion of
bridge loans of $1,000,000
and cash, net of issuance costs of $43,676 -- -- -- -- --
Preferred and common stock subscribed 1,266 (1,266) --
Issuance of common stock for exercisable options -- -- -- -- --
Issuance of common stock at $.76 per share for cash -- -- -- -- --
Deferred compensation related to stock options -- -- -- (12) --
Amortization of deferred compensation -- -- -- 11 --
Net loss -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1998 -- 1,266 (1,266) (1) --
Issuance of Series C preferred stock and warrants at
$5.63 per share in exchange for conversion of
bridge loans and cash, net of issuance costs
of $41,929 -- -- -- -- --
Issuance of preferred and common stock subscribed (1,266) 1,266 -- --
Issuance of common stock for exercisable options -- -- -- -- --
Issuance of common stock at $.76 per share for cash -- -- -- -- --
Deferred compensation related to stock options -- -- -- (3,538) --
Amortization of deferred compensation -- -- -- 1,324 --
Net loss -- -- -- -- --
--------- --------- --------- --------- ---------
DEFICIT
ACCUMULATED TOTAL
DURING THE STOCKHOLDERS'
DEVELOPMENT EQUITY
STAGE (DEFICIT)
----------- -------------
Balance at December 31, 1997 (11,920) 774
Issuance of Series C preferred stock and warrants at
$5.63 per share in exchange for conversion of
bridge loans of $1,000,000
and cash, net of issuance costs of $43,676 -- 4,709
Preferred and common stock subscribed
Issuance of common stock for exercisable options -- 6
Issuance of common stock at $.76 per share for cash -- 71
Deferred compensation related to stock options -- --
Amortization of deferred compensation -- 11
Net loss (9,624) (9,624)
--------- ---------
Balance at December 31, 1998 (21,544) (4,053)
Issuance of Series C preferred stock and warrants at
$5.63 per share in exchange for conversion of
bridge loans and cash, net of issuance costs
of $41,929 -- 6,959
Issuance of preferred and common stock subscribed -- 1,266
Issuance of common stock for exercisable options -- 93
Issuance of common stock at $.76 per share for cash -- 39
Deferred compensation related to stock options -- --
Amortization of deferred compensation -- 1,324
Net loss (14,284) (14,284)
--------- ---------
F-6
40
ISTA Pharmaceuticals, Inc.
Consolidated Statement of Stockholders' Equity (Deficit)
Period from February 13, 1992 (inception) to December 31, 2000 (continued)
(in thousands, except share and per share data)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
Balance at December 31, 1999 7,156,214 25,496 1,717,758 2
Issuance of Series C preferred stock at $11.70 per
share for acquisition of Visionex 3,319,363 28,773 -- --
Issuance of Series D preferred stock at
$5.63 per share 1,776,199 10,000 -- --
Issuance of common stock in conjunction with the
initial public offering, net of issuance costs
of $4,479 -- -- 3,450,000 3
Conversion of Preferred Stock to common stock (12,251,776) (64,269) 8,783,672 9
Issuance of Common Stock from exercise of warrants -- -- 797,014 --
Issuance of common stock for options -- -- 670,655 1
Common stock issued for services -- -- -- --
Deferred compensation related to stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Deemed dividend for preferred stockholders -- -- -- --
Net loss -- -- -- --
Foreign currency translation adjustment -- -- -- --
Unrealized gain on investments -- -- -- --
Comprehensive loss
----------- ----------- ----------- -----------
Balance at December 31, 2000 -- $ -- 15,419,099 $ 15
=========== =========== =========== ===========
PREFERRED AND
COMMON STOCK
ADDITIONAL SUBSCRIBED
PAID-IN ---------------------------- SUBSCRIPTIONS
CAPITAL SHARES AMOUNT RECEIVABLE
----------- ----------- ----------- -------------
Balance at December 31, 1999 3,889 -- -- --
Issuance of Series C preferred stock at $11.70 per
share for acquisition of Visionex -- -- -- --
Issuance of Series D preferred stock at
$5.63 per share -- -- -- --
Issuance of common stock in conjunction with the
initial public offering, net of issuance costs
of $4,479 31,743 -- -- --
Conversion of Preferred Stock to common stock 64,260 -- --
Issuance of Common Stock from exercise of warrants 41 -- -- --
Issuance of common stock for options 361 -- -- --
Common stock issued for services 113 -- -- --
Deferred compensation related to stock options 3,535 -- -- --
Amortization of deferred compensation -- -- -- --
Deemed dividend for preferred stockholders -- -- -- --
Net loss -- -- -- --
Foreign currency translation adjustment -- -- -- --
Unrealized gain on investments -- -- -- --
Comprehensive loss
----------- ----------- ----------- -----------
Balance at December 31, 2000 $ 103,942 -- $-- $--
=========== =========== =========== ===========
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
OTHER DURING THE STOCKHOLDERS'
DEFERRED COMPRESSIVE DEVELOPMENT EQUITY
COMPENSATION INCOME STAGE (DEFICIT)
------------ ------------ ----------- -------------
Balance at December 31, 1999 (2,215) -- (35,828) (8,656)
Issuance of Series C preferred stock at $11.70 per
share for acquisition of Visionex -- -- -- 28,773
Issuance of Series D preferred stock at
$5.63 per share -- -- -- 10,000
Issuance of common stock in conjunction with the
initial public offering, net of issuance costs
of $4,479 -- -- -- 31,746
Conversion of Preferred Stock to common stock -- -- -- --
Issuance of Common Stock from exercise of warrants -- -- -- 41
Issuance of common stock for options -- -- -- 362
Common stock issued for services -- -- -- 113
Deferred compensation related to stock options (3,535) -- -- --
Amortization of deferred compensation 3,165 -- -- 3,165
Deemed dividend for preferred stockholders -- -- (19,245) (19,245)
Net loss -- -- (21,857) (21,857)
Foreign currency translation adjustment -- (27) -- (27)
Unrealized gain on investments -- 149 -- 149
-----------
Comprehensive loss (21,735)
----------- ----------- ----------- -----------
Balance at December 31, 2000 $ (2,585) $ 122 $ (76,930) $ 24,564
=========== =========== =========== ===========
See accompanying notes.
F-7
41
ISTA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE PERIOD
FROM
FEBRUARY 13,
1992 (INCEPTION)
YEARS ENDED DECEMBER 31, TO
-------------------------------------- DECEMBER 31,
2000 1999 1998 2000
-------- -------- -------- ----------------
OPERATING ACTIVITIES
Net loss $(21,857) $(14,284) $ (9,624) $(57,640)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation 3,165 1,324 11 4,500
Common stock issued for services 113 -- -- 113
Depreciation and amortization 315 237 209 985
Changes in operating assets and liabilities:
Advanced payments -- clinical trials and other
current assets (166) (714) (185) (1,102)
Note receivable from officer (10) (10) (10) (162)
Accounts payable (217) 404 (57) 606
Accrued compensation and related expenses 290 (114) 34 364
Accrued expenses -- clinical trials and
other accrued expenses (2,406) 2,915 1,776 2,584
Deferred rent (11) (5) -- 12
License fee received from Visionex -- -- -- 5,000
-------- -------- -------- --------
Net cash used in operating activities (20,784) (10,247) (7,846) (44,740)
INVESTING ACTIVITIES
Purchases of marketable securities (19,808) -- -- (19,808)
Maturities of marketable securities 3,000 -- -- 3,000
Purchase of equipment (243) (254) (109) (1,889)
Proceeds from refinancing under capital leases -- -- -- 827
Deposits and other assets 123 153 (123) (116)
Cash acquired from Visionex transaction 4,403 -- -- 4,403
-------- -------- -------- --------
Net cash used in investing activities (12,525) (101) (232) (13,583)
FINANCING ACTIVITIES
Payments on obligation under capital leases (250) (193) (211) (812)
Proceeds from exercise of stock options 362 93 6 481
Proceeds from exercise of warrants 41 -- -- 41
Proceeds from bridge loans with related parties 1,250 500 1,000 5,047
Payments on bridge loans with related parties (1,750) -- (1,000) (3,755)
Proceeds from issuance of preferred stock 10,000 8,206 4,709 34,215
Repurchase of preferred stock -- -- -- (56)
Proceeds from issuance of common stock 31,746 58 71 31,961
-------- -------- -------- --------
Net cash provided by financing activities 41,399 8,664 4,575 67,122
Effect of exchange rate changes on cash (27) -- -- (27)
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents 8,063 (1,684) (3,503) 8,772
Cash and cash equivalents at beginning of period 709 2,393 5,896 --
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 8,772 $ 709 $ 2,393 $ 8,772
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 30 $ 52 $ 86 $ 277
======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Preferred stock issued in exchange for bridge
loans with stockholders and accrued interest $ -- $ -- $ 1,000 $ 2,357
======== ======== ======== ========
Extinguishment of liability through
acquisition of Visionex $ 5,000 $ -- $ -- $ 5,000
======== ======== ======== ========
Series C preferred stock issued for
acquisition of Visionex $ 28,773 $ -- $ -- $ 28,773
======== ======== ======== ========
Conversion of preferred stock to common stock $ 64,269 $ -- $ -- $ 64,269
======== ======== ======== ========
See accompanying notes.
F-8
42
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
ISTA Pharmaceuticals, Inc. ("ISTA" or the "Company") was incorporated in the
state of California on February 13, 1992 to discover, develop and market novel
therapeutics for diseases and conditions of the eye. ISTA's initial product
development efforts are focused on using highly purified formulations of the
enzyme hyaluronidase to treat diseases and conditions such as vitreous
hemorrhage, diabetic retinopathy, corneal opacification and keratoconus. The
Company's lead product candidate, Vitrase, currently in Phase III clinical
trials, is a proprietary drug for the treatment of vitreous hemorrhage. The
Company has not commenced commercial operations and is considered to be in the
development stage.
On March 8, 2000, ISTA acquired all the outstanding shares of Visionex Pte. Ltd.
in a transaction accounted for as a purchase (see Note 9). The operations of
Visionex are included in the consolidated financial statements since the date of
acquisition. All intercompany accounts have been eliminated in consolidation.
The Company reincorporated in Delaware on August 4, 2000 in conjunction with its
initial public offering (see Note 5).
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of business. Since inception, the Company has been primarily
engaged in research and development, and through December 31, 2000, the Company
has incurred accumulated losses of $76.9 million, which includes the deemed
dividend to preferred stockholders of $19.2 million (Note 9). Successful
completion of the Company's clinical trials and continuation of operations is
dependent upon the Company's ability to obtain adequate financing. Management
believes the funds on hand at December 31, 2000 are adequate to sustain
operations through December 31, 2001.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks, certificates of deposit and
short-term investments with original maturities of three months or less when
purchased. Cash and cash equivalents are carried at cost, which management
believes approximates fair value because of the short-term maturity of these
instruments.
F-9
43
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS
Investments with an original maturity of more than three months are considered
short-term investments and have been classified by management as
available-for-sale. Such investments are carried at fair value, with unrealized
gains and losses included as a separate component of stockholders' equity
(deficit).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities are considered to
be representative of their respective fair values because of the short-term
nature of those instruments.
CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and cash equivalents and
short-term investments.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Equipment and furniture are
depreciated using the straight-line method over their estimated useful lives
(generally five to seven years) and leasehold improvements are amortized using
the straight-line method over the estimated useful life of the asset or the
lease term, whichever is shorter. Equipment acquired under capital leases is
amortized over the estimated useful life of the assets.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, if indicators of impairment exist, the Company assesses the
recoverability of the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, the Company measures the
amount of such impairment by comparing the flows associated with the use of the
asset. While the Company's current and historical operating and cash flow losses
are indicators of impairment, the Company believes the future cash flows to be
received from the long-lived assets will exceed the assets' carrying value, and
accordingly, the Company has not recognized any impairment losses through
December 31, 2000.
F-10
44
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Expenditures relating to research and development are expensed in the period
incurred. The Company also expenses costs incurred to obtain and prosecute
patents as recoverability of such expenditures is not assured. Approximately
$344,000, $136,000 and $360,000 of patent-related costs were included in
research and development expense in 2000, 1999 and 1998, respectively. From
February 13, 1992 through December 31, 2000 the Company expensed approximately
$840,000 related to these costs.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for stock-based employee compensation. Under APB 25, if the
exercise price of the Company's employee and director stock options equals or
exceeds the estimated fair value of the underlying stock on the date of grant,
no compensation expense is recognized.
When the exercise price of the employee or director stock options is less than
the estimated fair value of the underlying stock on the grant date, the Company
records deferred compensation for the difference and amortizes this amount to
expense in accordance with Financial Accounting Standards Board ("FASB")
Interpretation No. 28 over the vesting period of the options.
Options or stock awards issued to non-employees are recorded at their fair value
as determined in accordance with SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction With Selling Goods or Services, and
recognized over the related service period. Deferred charges for options granted
to non-employees are periodically remeasured as the options vest.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-11
45
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Activities. In June 2000, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of
Effective Date of FASB No. 133 The statement defers for one year the effective
date of FASB No. 133. As of December 31, 2000, the Company did not hold any
derivative instruments or conduct any hedging activities. Therefore, there is no
anticipated impact to the consolidated financial statements for the Company's
adoption of SFAS No. 133 on January 1, 2001.
In March 2000, the FASB issued Interpretation No. 44, or ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation -- an interpretation of
APB Opinion No. 25. FIN 44 clarifies the definition of an employee for purposes
of applying APB 25, Accounting for Stock Issued to Employees, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 became effective on July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. Management believes that FIN 44 will not
have a material effect on the financial position or results of operations of the
Company.
NET LOSS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, and Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 98, basic net income (loss) per
common share is computed by dividing the net income (loss) for the period by the
weighted average number of common shares outstanding during the period. Diluted
net income (loss) per share is computed by dividing the net income (loss) for
the period by the weighted average number of common and common equivalent shares
outstanding during the period.
Pro forma net loss per common share has been computed as described above and
also gives effect to common equivalent shares arising from preferred stock that
was converted to common stock on the closing date of the initial public offering
(August 25, 2000), and the exercise of common stock warrants on that same date,
using the as-if converted method from the original date of issuance, as follows:
F-12
46
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE (CONTINUED)
DECEMBER 31,
--------------------------------
2000 1999
------------- -------------
Pro forma net loss per common share, basic and diluted $ (3.36) $ (1.95)
============= =============
Shares used in computing pro forma net loss per
common share, basic and diluted 12,235,642 7,329,149
============= =============
The Company has excluded all preferred stock, outstanding options and warrants,
and shares subject to repurchase from the calculation of diluted loss per common
share because all such securities are antidilutive for all periods presented.
The total number of shares excluded from the calculation of diluted net loss per
share, prior to application of the treasury stock method for options and
warrants, was 2,241,210, 8,595,271 and 6,551,123 for the years ended December
31, 2000, 1999 and 1998, respectively.
SEGMENT REPORTING
The Company has determined that it operates in only one segment.
COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income, SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
all changes in equity (net assets) during a period from non-owner sources. Net
loss and other comprehensive loss, including foreign currency translation
adjustment, and unrealized gains and losses on investments shall be reported,
net of their related tax effect, to arrive at comprehensive loss.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform with the current year presentation.
F-13
47
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET DETAILS
PROPERTY AND EQUIPMENT
Equipment and leasehold improvements and related accumulated depreciation and
amortization are as follows (in thousands):
DECEMBER 31,
---------------------
2000 1999
------- -------
Property and equipment:
Equipment $ 1,267 $ 1,116
Furniture and fixtures 369 325
Leasehold improvements 254 206
------- -------
1,890 1,647
Less accumulated depreciation and amortization (978) (663)
------- -------
$ 912 $ 984
======= =======
Total depreciation and amortization expense amounted to $315,000, $237,000,
$209,000 and $985,000 for the years ended December 31, 2000, 1999 and 1998 and
for the period from February 13, 1992 (inception) to December 31, 2000,
respectively.
ACCRUED EXPENSES
Other accrued expenses consist of the following (in thousands):
DECEMBER 31,
------------------
2000 1999
------ ------
Accrued general expenses $ 848 $ 208
Accrued state income tax payable 15 --
Accrued insurance premiums 356 --
------ ------
$1,219 $ 208
====== ======
F-14
48
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SHORT-TERM INVESTMENTS
At December 31, 2000, short-term investments in marketable securities were
classified as available-for-sale as follows (in thousands):
December 31, 2000
-----------------------------------
GROSS NET
AMORTIZED UNREALIZED ESTIMATED
COSTS GAINS FAIR VALUE
--------- ---------- ----------
Short-term investments:
Corporate debt securities $ 5,043 $ 1 $ 5,044
Commercial paper 10,268 147 10,415
U.S. government and agencies 1,497 1 1,498
------- ------- -------
$16,808 $ 149 $16,957
======= ======= =======
The contractual maturities of all short-term investments classified as
available-for-sale as of December 31, 2000 are all within one year.
Realized gains and losses were immaterial to the Company's financial results for
the year ended December 31, 2000.
4. RELATED PARTY TRANSACTIONS
A stockholder of the Company is also a stockholder of a supplier with which the
Company entered into an agreement in 1996. The supplier provides certain
manufacturing services to the Company. For the years ended December 31, 2000,
1999 and 1998 and the period from February 13, 1992 (inception) to December 31,
2000, the Company purchased, $288,000, $108,000, $148,000 and $715,000,
respectively, in services from the supplier.
In 1997, the Company provided an unsecured loan to an officer in the amount of
$126,000. The principal amount of the loan, plus accrued interest of 8% per
annum, is due and payable in full on May 30, 2002.
During the years ended December 31, 2000, 1999 and 1998 and the period from
February 13, 1992 (inception) to December 31, 2000, the Company made total
payments of approximately $41,000, $36,000, $31,000 and $181,000, respectively,
to a management company owned by a stockholder of the Company for reimbursement
of services performed on behalf of the Company and for reimbursement of
out-of-pocket expenses.
In November 1998, notes payable to certain stockholders totaling $1,000,000 were
converted into shares of Series C preferred stock at $5.63 per share.
F-15
49
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
In December 1999, certain stockholders of the Company provided an unsecured loan
to the Company in the amount of $500,000. In January 2000, the Company borrowed
an additional $1,250,000 from certain stockholders. The principal amount of the
loans, plus accrued interest at 9% per annum, was repaid in full in March 2000.
5. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
On August 25, 2000, the Company closed on its initial public offering with the
sale of 3,000,000 shares of common stock. On September 12, 2000, the
underwriters of the Company's initial public offering exercised their over
allotment to purchase an additional 450,000 shares. The net proceeds from the
initial public offering totaled $31.7 million. The Series A, B and C preferred
stock converted on a one to .74 basis into 7,759,606 shares of common stock and
the Series D preferred stock converted into 1,024,066 shares of common stock.
PREFERRED STOCK
At December 31, 1999, convertible preferred stock authorized and outstanding was
as follows:
SHARES SHARES LIQUIDATION
AUTHORIZED OUTSTANDING VALUE
----------- ----------- -----------
Series A 1,951,753 1,951,753 $ 1,951,753
Series A-1 1,951,753 -- --
Series B 1,955,555 1,955,555 5,377,776
Series B-1 1,955,555 -- --
Series C 8,503,036 3,248,906 18,291,341
Series C-1 8,503,036 -- --
----------- ----------- -----------
24,820,688 7,156,214 $25,620,870
=========== =========== ===========
During 2000, the Company issued 3,319,363 shares of Series C preferred stock at
$11.70 per share to acquire all the outstanding capital stock of Visionex, which
was convertible into 2,458,787 shares of common stock (see Note 9).
Also during 2000, the Company issued 1,776,199 shares of Series D preferred
stock at $5.63 per share to Allergan for proceeds of $10 million (see Note 10).
In the event the Company completed a dilutive issuance of common stock, each
share of Series A, Series B, Series C and Series D preferred stock held by
stockholders that did not participate in the issuance would have been converted
into one share of Series A-1, Series B-1, Series C-1 and Series D-1 preferred
stock, respectively, plus such number of fully paid, non-assessable shares of
common stock based on a conversion rate, subject to certain anti-dilution
provisions.
A dilutive issuance means an issuance of common stock (including securities
exercisable or convertible into common stock) for a consideration per share less
than the conversion price of the Series A, B, C and D preferred stock in effect
on the date of and immediately prior to such issuance.
F-16
50
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Each share of preferred stock was convertible into the number of fully paid and
nonassessable shares of common stock which results from dividing the conversion
price per share in effect for each series of preferred stock at the time of
conversion into the per share conversion value of such series. The initial
conversion price per share of Series A, Series A-1, Series B, Series B-1, Series
C, Series C-1, Series D and Series D-1 preferred stock was $1.00, $1.00, $2.75,
$2.75, $5.63, $5.63, $5.63 and $5.63, respectively. The per share conversion
value of Series A, Series A-1, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 preferred stock was $1.35, $1.35, $3.71, $3.71, $7.60,
$7.60, $7.60 and $7.60, respectively.
The holders of Series A, Series A-1, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 preferred stock (collectively "Preferred Stock") were
entitled to receive annual dividends of $0.08, $0.08, $0.22, $0.22, $0.45,
$0.45, $0.45 and $0.45 per share, respectively, when and if declared by the
board of directors, prior to and in preference to holders of common stock. The
right to such dividends, if declared by the Board of Directors, were cumulative.
As of December 31, 2000, no dividends were declared. In the event of a
liquidation of the Company, preferred stockholders were entitled to a
liquidation preference of $1.00 per share for Series A and Series A-1, $2.75 per
share for Series B and Series B-1, $5.63 per share for Series C and Series C-1,
and $5.63 per share for Series D and Series D-1, plus any declared and unpaid
dividends on such shares.
All outstanding shares of preferred stock converted into common stock upon the
closing of the initial public offering on August 25, 2000 (see above).
At December 31, 2000 the Company has 5,000,000 shares of preferred stock
authorized at a $.001 par value.
PREFERRED AND COMMON STOCK SUBSCRIBED
Preferred and common stock subscribed reflected 221,551 and 24,638 shares of the
Company's Series C preferred and common stock, respectively, subscribed by
certain stockholders in December 1998 at a per share price of $5.63 and $0.76,
respectively. A corresponding subscription receivable was included in
stockholders' equity as of December 31, 1998. In January 1999, the Company
completed the subscribed transaction, and all preferred and common stock
subscription amounts were received and all preferred and common stock and common
stock warrants subject to the subscriptions were issued. The common stock
warrants were not separately valued, therefore the entire proceeds from the
transaction are included in preferred stock in the accompanying balance sheet.
COMMON STOCK WARRANTS
In connection with the Series C preferred stock financing completed during 1998
and 1999, the Company also sold to the investors warrants to purchase 854,724
shares of common stock, which were bundled with the preferred stock as a
combined unit. Each of the combined units consists of 10 shares of preferred
stock and five warrants to purchase a share of common stock at $.076 per share.
The warrants expire upon the earlier of five years from the date of issuance or
the closing of an initial public offering. The warrants also provide the holder
with the option to receive common shares equal to the intrinsic value of the
warrant at the time of warrant exercise (a "cashless exercise"). As the warrants
were sold with the stock in a combined unit, the warrants were not separately
valued and the proceeds
F-17
51
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
from the financing were not allocated between Series C Preferred Stock and
common stock. Accordingly, the entire proceeds from the financing are included
in preferred stock in the accompanying balance sheet. In connection with the
Company's initial public offering in August 2000, all of the warrants were
exercised for the purchase of shares of common stock. A total of 801,498
warrants were used to purchase 743,788 shares of common stock in a cashless
exercise and 53,226 warrants were used to purchase 53,226 shares of common stock
in a cash exercise.
EMPLOYEE STOCK PURCHASE PLAN
In April 2000, the Company's Board of Directors adopted the Employee Stock
Purchase Plan (the "Stock Purchase Plan"), which initially provides for the
issuance of a maximum of 200,000 shares of common stock. Eligible employees can
have up to 15% of their earnings withheld, subject to certain maximums, to be
used to purchase shares of the Company's common stock every January and July.
The price of the common stock purchased under the Stock Purchase Plan will be
equal to 85% of the lower of the fair value of the common stock on the
commencement date of the offering period or the specified purchase date.
Included in accounts payable is $7,000 relating to the purchase of 707 shares of
common stock under the Stock Purchase Plan. As of December 31, 2000 none of
these shares had been issued to the participants.
The Stock Purchase Plan provides for annual increases in the number of shares
available for issuance under the plan on the first day of each year, beginning
in 2001, equal to the lesser of 200,000 shares, 1.5% of the outstanding shares
of common stock on the first day of the year, or a lesser amount as the Board of
Directors may determine.
STOCK COMPENSATION PLAN
The Company had reserved 3,148,148 shares of common stock under the 1993 Stock
Plan (the "Plan") for issuance to eligible employees, officers, directors and
consultants. The Plan provided for the grant of incentive and nonstatutory stock
options. Terms of the stock option agreements, including vesting requirements,
were determined by the Board of Directors, subject to the provisions of the
Plan. Options granted by the Company vest ratably over four years and are
exercisable from the date of grant for a period of ten years. The option price
F-18
52
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
equaled the estimated fair value of the common stock as determined by the Board
of Directors on the date of the grant. Upon completion of the Company's initial
public offering in August 2000, the 1993 Stock Plan was terminated. No further
option grants will be made under this Plan, and any shares reserved but not yet
issued and cancellations under the 1993 Stock Plan will be made available for
grant under the 2000 Stock Plan.
In 2000, the Company's stockholders approved the 2000 Stock Plan that became
effective upon the completion of the Company's initial public offering in August
2000. The 2000 Stock Plan provides for the grant of incentive stock options to
employees and for the grant of nonstatutory stock options and stock purchase
rights to employees, directors and consultants. A total of 200,000 shares of
common stock were initially reserved for issuance under the 2000 Stock Plan. The
2000 Stock Plan provides for annual increases in the number of shares available
for issuance under the plan on the first day of each year, beginning in 2001,
equal to the lesser of 200,000 shares, 1.5% of the outstanding shares of common
stock on the first day of the year, or a lesser amount as the Board of Directors
may determine.
As of December 31, 2000, a total of 374,601 shares of common stock were reserved
for issuance under the 2000 Stock Plan.
A summary of the Company's stock option activity and related information
follows:
WEIGHTED-
AVERAGE
PRICE EXERCISE
SHARES PER SHARE PRICE
--------- ------------- ---------
Outstanding at December 31, 1997 1,685,740 $ 0.21--$0.76 $ 0.46
Granted 302,594 $ 0.76 $ 0.76
Exercised (21,913) $ 0.21--$0.38 $ 0.26
Canceled (19,569) $ 0.38--$0.76 $ 0.60
---------
Outstanding at December 31, 1998 1,946,852 $ 0.21--$0.76 $ 0.50
Granted 1,000,074 $ 0.76 $ 0.76
Exercised (206,835) $ 0.21--$0.76 $ 0.44
Canceled (254,288) $ 0.38--$0.76 $ 0.71
---------
Outstanding at December 31, 1999 2,485,803 $ 0.21--$0.76 $ 0.59
Granted 687,222 $0.76--$10.40 $ 3.48
Exercised (659,141) $0.76--$10.40 $ 0.56
Canceled (272,674) $ 0.38--$0.76 $ 0.75
---------
Outstanding at December 31, 2000 2,241,210 $ 0.20-$10.40 $ 1.47
=========
F-19
53
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The following table summarizes information about options outstanding at December
31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE AND VESTED PRICE
-------------- ----------- ----------- -------- ----------- --------
$0.20 - $10.40 2,241,210 8.35 $1.47 1,286,592 $0.56
Pro forma net loss information has been determined as if the Company had
accounted for its employee stock options under the fair value method prescribed
in SFAS No. 123. The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The fair value of these options was estimated at the date of grant using the
minimum value pricing model for grants prior to the initial public offering and
the Black Scholes method for grants after the initial public offering with the
following weighted average assumptions for 2000, 1999 and 1998: risk-free
interest rate of 5.75%, 5.5% and 6.18%, respectively, zero dividend yield,
volatility of 72% in 2000 and none for 1999 and 1998; and a weighted-average
life of the option of five years. The estimated weighted average fair value of
stock options granted during 2000, 1999 and 1998 was $5.25, $.17 and $.16 and
respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the related options. The
Company's pro forma information follows (in thousands except per share data):
YEARS ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
--------- --------- ---------
Net loss attributable to common
stockholders, as reported $ (41,102) $ (14,284) $ (9,624)
========= ========= =========
Pro forma net loss $ (41,920) $ (14,360) $ (9,686)
========= ========= =========
Net loss per share, basic and diluted, as reported $ (6.01) $ (9.50) $ (7.17)
========= ========= =========
Pro forma net loss per share, basic and diluted $ (6.13) $ (9.56) $ (7.22)
========= ========= =========
F-20
54
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
SHARES RESERVED FOR FUTURE ISSUANCE
The following shares of common stock are reserved for future issuance at
December 31, 2000:
Stock plans:
Options granted and outstanding 2,241,210
Reserved for future option grants 374,601
---------
2,615,811
Stock purchase plan:
Reserved for future issuance 200,000
---------
2,815,811
=========
DEFERRED COMPENSATION
During the years ended December 31, 2000, 1999 and 1998 in connection with the
grant of various stock options to employees, the Company recorded deferred stock
compensation totaling $3,535,000, $3,538,000 and $12,000, respectively,
representing the difference between the exercise price and the estimated market
value of the Company's common stock as determined by the Company's management on
the date such stock options were granted. Deferred compensation is included as a
reduction of stockholders' equity and is being amortized to expense over the
vesting period of the options in accordance with FASB Interpretation No. 28,
which permits an accelerated amortization methodology. During the years ended
December 31, 2000, 1999 and 1998, the Company recorded amortization of deferred
compensation expense of $3,165,000, $1,324,000 and $11,000 respectively. As of
December 31, 2000, total charges to be recognized in future periods from
amortization of deferred stock compensation are anticipated to be approximately
$1,615,000, $746,000, $220,000 and $4,000 for the years ending December 31,
2001, 2002, 2003 and 2004, respectively.
6. COMMITMENTS AND CONTINGENCIES
CLINICAL TRIAL AGREEMENTS
During 1998, the Company entered into several agreements with contract research
organizations to perform Phase III clinical trials in various countries. Upon
early termination, the Company is subject to a termination fee of approximately
$200,000 as defined in the agreements. The Company presently has no intention of
terminating the agreements. As of December 31, 2000, the Company had
approximately $5.1 million of future obligations relating to services to be
provided under these agreements.
F-21
55
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS
The Company leases its corporate and laboratory facilities and certain equipment
under various operating leases. As of December 31, 2000, the Company has made
approximately $116,000 in cash deposits related to both capital and operating
leases. Provisions of the facilities lease provide for abatement of rent during
certain periods and escalating rent payments during the term. For financial
reporting purposes, rent expense is recognized on a straight-line basis over the
term of the lease. Accordingly, rent expense recognized in excess of rent paid
is reflected as deferred rent. Additionally, the Company is required to pay
taxes, insurance and maintenance expenses related to the building. Rent expense
on the facilities and equipment during 2000, 1999, 1998 and the period from
February 13, 1992 (inception) to December 31, 2000 was $518,000, $237,000,
$288,000 and $1,512,000, respectively.
Future annual minimum payments under operating and capital leases as of December
31, 2000 are as follows (in thousands):
OPERATING CAPITAL
YEARS ENDING DECEMBER 31: LEASES LEASES
- ------------------------- --------- -------
2001 $ 169 $ 16
2002 51 --
2003 25 --
2004 7
----- -----
$ 252 16
=====
Less amounts representing interest (1)
-----
Present value of future minimum lease payments 15
Less current portion (15)
-----
Long-term obligation under capital leases $ --
=====
PURCHASE COMMITMENTS
The Company entered into a long-term supply agreement with a manufacturer of
hyaluronidase in the United Kingdom. The supply agreement provides for the
United Kingdom manufacturer to supply, and the Company to purchase, certain
minimum levels of hyaluronidase. At December 31, 2000, the approximate future
purchase commitments under the supply agreement are as follows (in thousands):
2001 $ 235
2002 564
2003 705
------
$1,504
======
F-22
56
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
At December 31, 2000, the Company had federal and California income tax net
operating loss carryforwards of approximately $41,161,000 and $33,972,000,
respectively.
The federal tax loss carryforwards will begin to expire in 2007, unless
previously utilized. Approximately $502,000 of the California tax loss
carryforwards expired in 2000 and the remaining California tax loss
carryforwards will continue to expire in 2001, unless previously utilized. The
Company also has federal and California research tax credit carryforwards of
approximately $2,040,000 and $1,249,000, respectively, which will begin to
expire in 2010, unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the
Company's tax loss and credit carryforwards may be limited because of cumulative
changes in ownership of more than 50% that have occurred. However, the Company
does not believe such limitation will have a material impact upon the
utilization of these carryforwards.
Significant components of the Company's deferred tax assets are shown below. A
valuation allowance of $22,746,000 has been established to offset the deferred
tax assets, as realization of such assets is uncertain.
DECEMBER 31,
-------------------------------
2000 1999
------------ ------------
Deferred tax asset:
Net operating loss carryforwards $ 16,360,000 $ 6,907,000
Research and development credits 2,852,000 2,027,000
Capitalized research and development 2,916,000 4,505,000
Deferred revenue -- 2,037,000
Other, net 618,000 269,000
------------ ------------
Total deferred tax asset 22,746,000 15,745,000
Valuation allowance for deferred tax assets (22,746,000) (15,745,000)
------------ ------------
$ -- $ --
============ ============
A portion of the deferred tax assets related to net operating loss carryforwards
as of December 31, 2000 include amounts related to stock option activity for
which subsequent recognizable tax benefits, if any, will be credited to
stockholders' equity.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Savings Plan (the "Plan") covering substantially all
employees that have been employed for at least three months and meet certain age
requirements. Employees may contribute up to 15% of their compensation per year
(subject to a maximum limit by federal tax law). The Company does not provide
matching contributions to the Plan.
F-23
57
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. VISIONEX AGREEMENTS AND ACQUISITION
In June 1997, the Company entered into a seven-year agreement with Visionex Pte.
Ltd. ("Visionex"), a Singapore corporation. The Company granted Visionex the
exclusive right to register, import, market, sell and distribute the Company's
products in East Asia (excluding Japan and Korea) in exchange for a license fee
paid by Visionex to the Company of $5,000,000. Upon the formation of Visionex,
the Company had no ownership interest in Visionex, but investors owning 87.3% of
ISTA also owned 62.5% of Visionex. At March 8, 2000, investors who owned 66% of
ISTA shares controlled 100% of Visionex shares. In addition, three of the five
board members of Visionex at December 31, 2000 are also board members of the
Company.
The Company also entered into a Call Option Agreement (the "Agreement") with
Visionex and its shareholders (the "Shareholders"), whereby the Company could
require the Shareholders to exchange their outstanding shares of Visionex stock
(the "Preference Shares") for the Company's stock (the "Call Option"). The
Visionex Preference Shares would have been exchanged for a range dependent upon
the annual revenues of Visionex, as defined in the Agreement, of 1,668,662 up to
2,458,786 shares of the Company's common stock, or, if the Company had not yet
successfully completed an initial public offering, Series C preferred stock. The
Call Option could have been exercised by the Company anytime during the two-year
period beginning June 27, 2000, but could have been deferred for a period of up
to two years by a majority of the holders of the Preference Shares.
The Agreement also provided for a put option whereby each of the Visionex
Shareholders could require the Company to purchase the outstanding Preference
Shares held by such shareholder. The per share purchase price that was to be
paid by the Company under the put option was 0.1689 shares of the Company's
common stock, or, if the Company had not yet successfully completed an initial
public offering, Series C preferred stock (up to a maximum of 2,252,694 shares).
The put option was exercisable anytime in the three-year period beginning June
27, 1999.
The Company's financial statements through December 31, 1999 do not include the
assets, liabilities, or results of operations of Visionex due to the Company's
lack of ownership interest in Visionex and lack of control of the operations of
Visionex during such period. Due to the existence of the put option, the $5
million license fee received from Visionex was recorded as a liability as of
December 31, 1999.
On March 8, 2000, the Company issued 3,319,363 shares of Series C preferred
stock to acquire all of the outstanding capital stock of Visionex, which was
convertible into 2,458,787 shares of common stock. The assets of Visionex
consisted primarily of cash of approximately $4.4 million and the product rights
originally acquired from the Company by Visionex. The tangible assets were
valued at Visionex's carrying value, which approximates fair value. The Company
recorded no value for such intangible assets since (i) Visionex had not made any
substantial progress in commercializing the products since it had originally
acquired them, and (ii) the intangible assets had originally been acquired from
the Company, and (iii) the Company
F-24
58
ISTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. VISIONEX AGREEMENTS AND ACQUISITION (CONTINUED)
had no historical cost basis in the assets prior to the transfer of them to
Visionex. The liability related to the license fee received from Visionex was
extinguished and transferred to equity. Accordingly, the Company recognized a
deemed dividend of $19.2 million in the first quarter of 2000 for the excess of
the estimated value of the shares issued over the net tangible assets acquired.
The Company's consolidated financial statements for 2000 include the operations
of Visionex since the date of acquisition.
Had the acquisition of Visionex occurred on January 1, 2000 or January 1, 1999,
the Company's unaudited pro forma combined net loss and net loss per share for
2000 and 1999 would have been $21,852,000 and $14,260,000 and $1.79 and $1.46,
respectively, excluding the deemed dividend.
10. ALLERGAN AGREEMENT
In March 2000, the Company entered into a license agreement with Allergan, under
which Allergan will be responsible for the marketing, sale and distribution of
Vitrase in the United States and all international markets, except Mexico and
Japan. Under a related supply agreement, the Company will supply all of
Allergan's requirements of Vitrase at a fixed price per unit subject to certain
future adjustments. The term of the license is ten full years after the date of
the first commercial sale. Profits on the sale of Vitrase in the United States
will be shared equally between Allergan and the Company. The Company is
responsible for all costs of product development, preclinical studies and
clinical trials of Vitrase and may receive up to $35.0 million in payments from
Allergan upon the achievement of specified regulatory and development
objectives.
The Company also issued 1,776,199 shares of Series D preferred stock to Allergan
at $5.63 per share for proceeds of approximately $10.0 million. These shares
were converted into 1,024,066 shares of common stock upon completion of the
Company's initial public offering.
11. GEOGRAPHIC INFORMATION
During 2000, the Company purchased certain laboratory and production equipment
for use in Mexico and the United Kingdom. Laboratory and production equipment
located in these countries totaled $180,000 and $385,000 at December 31, 2000
and 1999, respectively.
The Company also has certain obligations denoted in foreign currency relating to
clinical trials in Mexico, the United Kingdom, Poland, Germany, and the
Netherlands. At December 31, 2000 and 1999 these obligations totaled $24,000 and
$74,000, respectively.
F-25
59
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1* Amended and Restated Certificate of Incorporation, currently in
effect
3.2* Bylaws of the registrant currently in effect
4.1* Specimen common stock certificate
10.1* Amended and Restated Investors Rights Agreement dated as of
March 29, 2000
10.2* 1993 Stock Plan and forms of agreements thereunder
10.3* 2000 Stock Plan and forms of agreements thereunder
10.4* 2000 Employee Stock Purchase Plan
10.5* Form of Indemnification Agreement with executive officers and
directors
10.6* Clinical Development Agreement between Covance, Inc. and the
registrant dated as of October 28, 1998, as amended
10.7* Agreement between CroMedica Global Inc. and the registrant as of
September 8, 1998
10.8* Agreement between CroMedica Global Inc. and the registrant as of
May 19, 1999
10.9* Lease between the registrant and Aetna Life Insurance Company
dated September 13, 1996 for leased premises located at Suite
100, 15279 Alton Parkway, Irvine, California
10.10* Lease between the registrant and Aseguradora Mexicana, S.A.
dated December 30, 1993 for leased premises located at Paseo de
los Heroes No. 10, 105 in the development known as "Desarrollo
Urbano del Rio Tijuana" in Tijuana, B.C., Mexico
10.11* Equipment Financing Agreement between Lease Management Services,
Inc. and the registrant as of October 7, 1996, as amended
10.12* Agreement between Visionex Pte. Ltd. and the registrant as of
June 1997
10.13* Distributor Agreement between Laboratories Sophia S.A. de C.V.
and the registrant as of April 23, 1998
10.14* Manufacture and Supply Agreement between Prima Pharm, Inc. and
the registrant as of December 19, 1996
10.15* Supply Agreement between Biozyme Laboratories, Ltd. and the
registrant as of September 23, 1999
10.16*+ License Agreement between Allergan Sales, Inc., Allergan Sales,
Ltd. and the registrant as of March 29, 2000
10.17*+ Supply Agreement between Allergan Sales, Inc., Allergan Sales,
Ltd. and the registrant as of March 29, 2000
10.18* Series D Preferred Stock Purchase Agreement between Allergan
Pharmaceuticals (Ireland) Ltd., Inc. and registrant, dated as of
March 29, 2000
10.19* Call Option Agreement between Visionex Pte. Ltd. and the
registrant as of June 27, 1997
10.20 Amendment No. 1 to Contract Clinical Research Agreement with
CroMedica Global, Inc., dated May 19, 1999
10.21 Amendment No. 2 to Contract Clinical Research Agreement with
CroMedica Global, Inc., dated May 19, 1999
21.1* Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (contained in the signature page to this
Report)
- -----------
* Incorporated by reference to the Registration Statement on Form S-1 and
all amendments thereto filed with the Securities and Exchange Commission
on April 5, 2000 (File No. 333-34120). The Securities and Exchange
Commission initially declared the Registration Statement effective on
August 9, 2000. ISTA subsequently filed two post-effective amendments to
the Registration Statement, the last of which was declared effective on
August 21, 2000.
+ Confidential treatment requested and received as to certain portions.
These exhibits are incorporated by reference to the Registration
Statement on Form S-1 and all amendments thereto filed with the
Securities and Exchange Commission on April 5, 2000 (File No.
333-34120). The Securities and Exchange Commission initially declared
the Registration Statement effective on August 9, 2000. ISTA
subsequently filed two post-effective amendments to the Registration
Statement, the last of which was declared effective on August 21, 2000.